QUESTION 5 (20 MARKS: 36 MINUTES)

Juara Tire Sdn Bhd (JTSB) is one of the largest tire manufacturer in Asia and it is the leading supplier to the automotive industry for the tire technology in Malaysia. In line with the Fourth Industrial Revolution (IR 4.0) technology advancement, JTSB is considering some investments to be made by the company for the year 2020. These proposals are as follows:

(i)First Proposal:

JTSB desires to buy a new coding machine to help control tire inventories. Two coding machine are being considered: CM1 and CM2. Either coding machine will require an investment of RM20,000. The company financial analyst estimates the expected cash flows for these two coding machine are as follows:

Year

CM1 (in RM)

CM2 (in RM)

Year 1

6,000

6,000

Year 2

8,000

8,000

Year 3

10,000

10,000

year 4

10,000

3,000

Year 5

10,000

3,000

(ii)Second proposal:

JTSB is considering two different modifications project to its current manufacturing process. JTSB requires a minimum rate of return of 8%. Other relevant investment information associated with the two projects are as follows:

Investment Information

Project T1

Project T2

Initial investment

RM500,000

RM100,000

Annual cash flows

RM88,500

RM34,320

Life of the project

10 years

4 years

Depreciation per year

RM50,000

RM25,000

(iii)Third proposal:

JTSB needs to overhaul its tire auto lift system or buy a new one. To fulfil this purpose, JTSB is evaluating a proposal to purchase a new machine that would cost RM100,000 and have a salvage value of RM10,000 in four years. It would provide annual operating cash savings of 10,000, as follows:

Current Machine (in RM)

New Machine (in RM)

Salaries

40,000

36,000

Supplies

7,000

5,000

Maintenance

9,000

5,000

Total

56,000

46,000

If the new machine is purchased, the current machine will be sold for its current salvage value of RM20,000. If the new machine is not purchased, the current machine will be disposed of in four years at a predicted salvage value of RM2,000. The current machine's present book value is RM40,000. If kept, in one year the current machine will require repairs predicted to cost RM35,000. JTSB's cost of capital is 14%.

(iv)Fourth proposal:

JTSB also is considering to buy a tire molding machine that can be integrated into its computerized manufacturing process which use the computer-added manufacturing (CAM) equipment. It has received three bids for the machine and related manufacturer's specifications. The bids range from RM3,500,000 to RM3,550,000. The estimated annual savings of the machines range from RM260,000 to RM270,000. The payback periods are almost identical and the net present values are all within RM8,000 of each other.

(v)Fifth proposal:

JTSB has RM100 million available for investment in the following potential investment opportunities in the year 2020:

Project

NPV

Initial Investment

A

RM5 million

RM15 million

B

RM15 million

RM50 million

C

RM10 million

RM10 million

D

RM20 million

RM60 million

E

RM12 million

RM35 million

REQUIRED:

(a)For the first proposal:

i.By assuming that each coding machine is depreciable, analyze the payback period for CM1 and CM2. Show all workings.

(1 Mark)

ii.If rapid payback is important, which coding machine should be chosen? Discuss your decision.

(1 Mark)

(b)For second proposal, analyze the following for each project T1 and T2 (show all workings):

i.Accounting rate of return

(2 Marks)

ii.Net present value

(2 Marks)

iii.Internal rate of return

(2 Marks)

iv.Given that only one project can be selected, which project should JTSB choose? Discuss TWO (2) reasons of your decision.

(2 Marks)

(c)For the third proposal, by using net present value method, determine whether JTSB should purchase the new machine or not (show all workings). Discuss your answers.

(4 Marks)

(d)For the fourth proposal, the Chief Executive Officer (CEO) of JTSB, Dato' Johan just does not know what to do about which vendor to choose since all of the selection criteria are so close together. Give ONE (1) suggestion to him and include THREE (3) examples to support your suggestion.

(2 Marks)

(e)For the fifth proposal, identify the projects that should be accepted by JTSB and rank the accepted projects based on the profitability index. Show all workings.

(4 Marks)