Rex Berhad is considering buying a new production machine. The proposed machine would cost the company RM85,000 and require an installation and modification cost of RM1,500 to be installed properly. In addition, the new machine would require an increase of inventory and account payable of RM 3 000 and RM1 700 respectively. The new machine will be depreciated over its five year life using the simplified straight line method. By using the new machine, sales is expected to increase by RM25 000 and annual maintenance cost for the new machine would be 10 percent of the incremental sales over the life of the asset. At the end of its life the firm expect to be able to sell the machine for RM10 000. The firms tax rate is 28 percent and its required rate of return is 12 percent.

A. Calculate the initial outlay associated with the new machine.

B. Calculate the annual cash flow.

C. Calculate the terminal cash flow.

Should the firm buy the machine? Justify your answer.