QUESTION 5 (20 MARKS: 48 MINUTES)

Xhalida Drycleaning Sdn Bhd (XDSB) would like to purchase a new machine for cleaning large quilts and comforters. The current cleaning operations on quilts and comforters is done by hand. The new machine would cost RM12,500. The estimated service life is 12 years, at which time it is estimated that the machine could be sold for RM500.

The company estimates that it would cost RM700 per year to operate the machine. The current costs of manual cleaning is RM3,000 per year. In addition to reduce the costs, the new machine would increase the dry cleaner's ability to clean quilts and comforters by 600 quilts per year. The company realizes a net contribution margin after tax effects of RM1.50 per quilt or comforter. A 10% rate of return is required on all investments. XDSB expects its tax rate to be 30%.

REQUIRED:

(a)Write a report to top management which would help them to decide either to purchase the new machine or not. Use Net Present Value (NPV) technique to support your calculations.

(14 Marks)

(b)Discuss THREE (3) strengths of NPV technique in evaluating the capital investment decision to convince the top management.

(6 Marks)