Sooka Chit Sdn Bhd is evaluating the purchase of a new machine to produce widgets, which has a short product life-cycle due to rapidly changing technology. The machine is expected to cost RM1 million. Production and sales of widgets are forecast to be as follows: Year 1 2 3 4 Production and sales (units/year) 35,000 53,000 75,000 36,000 The selling price of widgets (in current price terms) will be RM20 per unit, while the variable cost of the product (in current price terms) will be RM12 per unit. Selling price inflation is expected to be 4% per year and variable cost inflation is expected to be 5% per year. No increase in existing fixed costs is expected since Sooka Chit Sdn Bhd has spare capacity in both space and labour terms. Producing and selling widgets will call for increased investment in working capital. Analysis of historical levels of working capital within Sooka Chit Sdn Bhd indicates that at the start of each year, investment in working capital for widgets will need to be 7% of sales revenue for that year. Sooka Chit Sdn Bhd pays tax of 30% per year in the year in which the taxable profit occurs. Fixed costs is RM250,000 per year from year 1 to 4. 3 Sooka Chit Sdn Bhd uses a nominal (money terms) after-tax cost of capital of 12% for investment appraisal purposes. Required: a) Calculate the net present value of the proposed investment in widgets. [23 marks] b) Discuss how the net present value method of investment appraisal contributes towards the objective of maximising the wealth of shareholders.

Depreciation 25%