Question 7.6 FITRI Co. is considering an investment in new machinery that will reduce operating costs through increasing energy efficiency. The new machinery will cost RM1 million and have a four-year life, at the end of which it will have a scrap value of RM100,000 A license fee of RM105,000 is payable at the end of the first year. This license fee will increase by 4% per year in each subsequent year. The new machinery is expected to reduce operating costs by RM5-80 per unit in the first year, Due to being more familiar in operating the machinery, the operating costs will further reduce by RM0.50 per unit in the following year starting from year three onwards. Forecast production volumes over the life of the new machinery are expected to be as follows Year 4 80,000 Production (units per year) 60,000 75,000 95,000 If FITRI Co. bought the new machinery, it would finance the purchase through a four- yearloan aying interest at an annual before-tax rate of 85% per year. Alternatively, FITRI Co. could lease the new machinery. The company would pay four annual lease rentals of RM380,000 per vear, payable in advance at the start of each year The annual lease rentals include the cost of the license fee If FITRI Co. buys the new machinery, it can claim capital allowances on the investment on a 25% reducing balance basis. The company pays taxation one year in arrears at an annualrteof 309 FT TCO has an after-tax weightedaverage cost of capital of 11% per year Note: Answers should be rounded up to the nearest RM Required: Based only on financing cash flows, calculate and determine whether FITRI Co. should lease or buy the new machinery. (11 marks) Calculate the net present value of buying the new machinery and advise whether FITRI Co. should undertake the proposed investment. (6 marks) 153