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QUESTION 4 Part A NCO Berhad (NCO) is a manufacturer of high-quality tools for those working in the engineering industry. The mission statement of
QUESTION 4 Part A NCO Berhad (NCO) is a manufacturer of high-quality tools for those working in the engineering industry. The mission statement of the company declares that it is dedicated to maximising the wealth of its shareholders and, since it was formed in 2019, the company has grown rapidly. Recently, the company has developed a new type of drill and the directors of the company are now considering whether this drill should be manufactured and sold. The following information is available to help evaluate the viability of the new product: i. ii. iii. iv. V. vi. Costs incurred in designing and developing the new drill, which have all been paid, were RM300,000. These costs are to be written off in equal instalments against profits generated over the new product's expected life of four years. Sales are expected to be 20,000 drills per year over the next four years. The selling price of each drill will be RM50 in the first three years and RM40 in the final year. Variable operating costs are estimated to be RM20 for each drill. Additional fixed operating costs are expected to be RM250,000 per year. New equipment costing RM500,000 (with estimated salvage value of RM20,000 at the end of year 4) has to be purchased immediately to produce the new product. The equipment will be sold at the end of four years for RM10,000. Additional working capital of RM150,000 will be required immediately to support the manufacture of the new product. This will be released at the end of the life of the new product. AJ/SKD BAC3674 5/7 ADVANCED MANAGEMENT ACCOUNTING Continued... 10 JUNE 2020 The company uses the net present value method to evaluate new investment opportunities. The company uses a cost of capital of 10%. The present value of RM1 is as below:
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