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QUESTION 4 You are currently evaluating on an appraisal of a project to purchase a new machine in a company which you have been
QUESTION 4 You are currently evaluating on an appraisal of a project to purchase a new machine in a company which you have been appointed as an assistant accountant. The machine will cost RM65,000 and will have a useful life of three years. You have already estimated the cash flows from the project and their taxation effect, and the results of your estimates can be summarized as follows: After-tax cash inflow Year 1 RM20,000 Year 2 RM32,000 Year 3 RM29,000 Your company uses an after-tax cost of capital of 8% to appraise all projects of this type: Note: Discount factor (8%) Year 1 0.926 Year 2 0.857 Year 3 0.794 Required: a) Calculate the net present value of the proposal to purchase the machine. Ignore the effects of inflation and assume that all cash flows occur at the end of the year. (5 marks) b) Calculate the payback period for the investment in the machine. (2 marks) c) The marketing director has asked you to let her know as soon as you have completed your appraisal of the project. She has asked you to provide her with some explanation of your calculations and of how taxation affects the proposal. Required: Prepare a memorandum to the marketing director which answers her queries. Your memorandum should contain the following: i. ii. iii. Your recommendation concerning the proposal to purchase a new machine. An explanation of the meaning of the net present value and the payback period. An explanation of the effects of taxation on the cash flows arising from capital expenditure. (8 marks) d) One of top management in this company does not grasp the difference between committed and discretionary costs. You are required to explain the difference between these two categories of costs. (5 marks) e) Could a cost be considered discretionary by one firm and committed by another? If so, discuss and give an example. If not, discuss why not. (5 marks) [TOTAL: 25 MARKS]
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