QUESTION 5 (20 MARKS)

Alexandria Sdn Bhd is looking to upgrade a machine used in its productions. The cash flow items are tabled below:

Old Machine New Machine

Estimated Life 3 years 3 years

Current Book Value RM8,000 Not applicable

Current Selling Price RM10,000 Not applicable

Estimated Sale Price @ t=3 RM0 RM6,000

Purchase Price Not applicable RM40,000

Annual depreciation RM2,000 RM8,000

Currently the level of revenue generated is RM60,000 per annum. However, since the new machine improves the quality of the product, sales is expected to increase by RM2,400 per annum.

The old machine's production costs average RM30,000 per annum but the new machine is expected to save RM1,400 per annum. The current and expected tax rate over the next four years is 30 percent with the after-tax required return by the firm set at 12 percent per annum.

1. Prepare the cashflow and calculate the Net Present Value (NPV) for the old machine.

(6 marks)

2. Prepare the cashflow and calculate the Net Present Value (NPV) for the new machine.

(12 marks)

3. Based on your calculation above, should the firm buy the new machine?

(2 marks)