Question 4

(a) Wonderful is looking at a new system with an installed cost of RM438,000. This cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for RM69,000. The sausage system will save the firm RM129,000 per year in pre-tax operating costs, and the system requires an initial investment in net working capital of RM29,000, which will be recouped at project end. If the tax rate is 35 percent and the discount rate is 9 percent, what is the NPV of this project?

(b) Consider an asset that costs RM450,000 and is depreciated straight-line to zero over its six-year life. The asset is to be used in a four-year project; at the end of the project, the asset can be sold for RM180,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

(c) Payung Bhd is considering making and selling custom umbrellas in two sizes. The small umbrella would be priced at RM10, and the large umbrella would be RM24. The variable cost per unit is RM5 and RM11, respectively. Sofia, the owner, feels that she can sell 2,600 of the small umbrellas and 1,700 of the large umbrellas each year. The fixed costs would be only RM2,100 a year and the tax rate is 34 percent. What is the annual operating cash flow if the annual depreciation expense is RM900?