QUESTION $5(20$ MARKS: $36$ MINUTES$)$

Xpert Sdn$.$ Bhd$.($XSB$)$ manufactures T$-$chip, a specialized component for automobiles. XSB is expecting substantial increases in demand for the coming years. Next year in $2024,$ XSB already has a few contracts to deliver $1,000$ units of T$-$chip at an average price of RM$1,500$ per unit. Its marketing manager forecasts sales growth of T$-$chip around $20\%$ per year through $2028.$

XSB$\text{'}$s current production capacity is limited to $800$ units annually. In view of that, the production manager proposes an upgrading of the existing machine. If the machine is upgraded, the costs to upgrade can be capitalized and depreciated over its useful life. On the other hand, the marketing manager suggests replacing the old machine with a new model. The existing machine is fully depreciated and can be sold for RM$210,000$ if the machine is replaced. However, replacement will be quite expensive. The finance manager, Mr$.$ Haris will present all relevant information on those two options in the coming meeting. The following data are pertaining to the options:

$\backslash$table$[[,$Replacement,Upgrading$],[$Initial investment in $2024,$RM$2,200,000,$RM$1,092,000],[$Project life,$5$ years,$5$ years$],[$Total annual cash operating costs per unit,RM$1,000,$RM$1,200]]$

XSB applies required rate of return of $12\%.$ There is no difference between the replacement and upgrading option in terms of required working capital.

For simplicity, please assume that there is no change in prices or costs in future years and ignore tax implications. Investment will be made at the beginning of $2024,$ and all transactions thereafter occur on the last day of the year. XSB applies straight$-$line depreciation method, assuming zero disposal value.

REQUIRED:

$($a$)$ Generate the net present value $($NPV$)$ for the replacement and upgrading options over a $5$ year$-$period $(2024-2028).$ Clearly show all your workings. $($Round up your answers to the nearest Ringgit Malaysia.$)$

$(10$ Marks$)$

$($b$)$ Calculate the payback period for the replacement and upgrading options.

$(5$ Marks$)$

$($c$)$ Analyze which option Mr$.$ Haris would propose to the top management.

$(3$ Marks$)$

$($d$)$ Identify TWO $(2)$ qualitative factors that should be considered in choosing between the options.

$(2$ Marks$)$

END OF QUESTIONS