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Question 5 a) Oris plans to purchase a new assembly machine for RM23,000. It will cost RM2,000 to have the new machine installed and expect
Question 5 a) Oris plans to purchase a new assembly machine for RM23,000. It will cost RM2,000 to have the new machine installed and expect a RM1,000 net increase in working capital. By making the investment, it will reduce the company annual operating costs by RM7,000 and expect to save RM500 a year in maintenance cost. The new machine will require RM750 each year for technical support. The company will depreciate the machine over 5 years under the straight-line method of depreciation with an expected salvage value of RM5,000. The effective tax rate is 35%. Perform net present value (NPV) and internal rate of return (IRR) analysis to determine the feasibility of the project at 10% cost of capital. Advise Oris appropriately if project acceptance is at 12% hurdle rate. (14 marks) b) Referring back to Question 5 a), i) if there is an existing machine that can be sold for RM3,000 for replacement of this new machine, discuss the effect of selling existing machine on the investment budget. Show the rough estimation of the effect on the budget. (3 marks) ii) if the 3-Year MACRs technique of depreciation is used to develop the incremental cash flow of the project, discuss the effect of this technique to the project net cash flow statement without detail calculation. (3 marks) [Total: 20 marks]
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