Samudera Electronic Company (SEC) has been in operation for a number of years. The company is considering to develop and market a new appliance using microprocessor technology. The new appliance is suitable for installation in residential and commercial premises. SEC's marketing manager believes that annual sales would be 22,000 units if the units were priced at RM2,100 each. The engineering department has reported that the firm would need additional manufacturing capability, and SEC currently has an option to purchase an existing building, at a cost of RM25 million which would meet this need. The building would be bought and paid for at the end of the year, i.e., December 31, 2020. The necessary equipment would be purchased, installed and paid at the end of 2020. It would cost RM15 million, including transportation, installation and training. The project would require an initial investment of RM10 million net working capital. The initial working capital investment would also be made at the end of 2020. The project's estimated economic life is five years. At the end of that time, the building is expected to have a market value of RM4 million and a book value of RM2 million, where the equipment would have a market value of RM1.5 million and a book value of RM1 million. The company is required to pay capital gain tax at the rate similar to the corporate tax rate. The production department has estimated that the variable manufacturing costs. The percentage of the variable manufacturing costs to total revenue depends on the last alphabet of your mother's name as shown in the table below. The fixed overhead costs, excluding depreciation, would be RM8 million per year. The depreciation for building and equipment would be determined using straight-line depreciation method. SEC's corporate tax rate and capital gain tax rate on building and equipment depend on the last alphabet of your mother's name. For capital budgeting purposes, the company's policy is to assume that operating cash flows occur at the end of each year. Because the plant would begin its operations on January 1, 2021, the first operating cash flow would occur on December 31, 2021. Corporate tax/capital gain tax Variable cost to revenue% Discount rate( WACC) 32 61 15 By taking into consideration the working capital requirement, estimate the project's total net investment in the initial year. a. (4 marks) b. Compute the annual depreciation for the building and equipment. (2 marks) c. Calculate the annual operating cash flows of the project. (8 marks) d. Calculate the terminal cash flow of the project after capital gain tax. (3 marks) e. Based on the WACC as determined by the last alphabet of your mother's name, what is the discounted payback period of this project? Should the project be accepted based on this method? Justify (4 marks) f. Based on the WACC, determine the project's net present value (NPV). What does this value indicate? Based on NPV, should the project be accepted? Justify. (8 marks) 8 Is the internal rate of return (IRR) of the project greater or lower than the WACC used? Justify, Should the project be accepted based on the IRR method? Justify. (3 marks) h. One method to analyze the riskiness of a project is by conducting a sensitivity analysis. Demonstrate how this could be conducted in the context this project. (4 marks) i. Another comprehensive method to analyze the riskiness of a project is by conducting scenario analysis. Briefly describe how this method could be applied in the context of this project. (4 marks) ANSWER MUST BE IN THE TABLE A PROJECTED CASH FLOW SEC'S PROJECT Year 0 1 2 3 4 5 Sales (units) Revenue Initial Cost Building Equipment Working capital Total Operating Expenses Variable manufacturing cost@60% sales Fixed overhead cost Depreciation - building Depreciation - equipment Total operating expenses Income before tax Tax Net income Operating cash Flow (add back depreciation) Terminal Cash Flow Return of working capital Resale value of building Book value of building Gain in value of building Tax on gain value of building Terminal value of building Resale value of equipment Book value of equipment Gain on value of equipment Tax on gain value of equipment Terminal Value of equipment Total terminal value Net Cash Flow PV NPV IRR