SUBJECT - FINANCIAL MANAGEMENT

Question 1

Bina-Puri Bhd. is a listed company which plans to meet increased demand for its products by buying new machinery costing RM5 million. The machinery would last for four years, at the end of which it would be replaced. The scrap value of the machinery is expected to be 5% of the initial cost. Capital allowances would be available on the cost of the machinery on a 25% reducing balance basis, with a balancing allowance or charge claimed in the final year of operation. In addition to the initial cost of the new machinery, initial investment in working capital of RM500,000 will be required.

This investment will increase production capacity by 9,000 units per year and all these units are expected to be sold as they are produced. Relevant financial information in current price terms is as follows:

Bina-Puri pays tax on profits at the rate of 20% per year, in which liabilities arise. The company's target capital structure is 20% debt and 80% common stock. The before-tax yield to maturity on its bond is 8.5%. The risk-free rate (kg) is 5 percent, and the market risk premium (k+-k ) is 9 percent. The companys current beta is 1.2.

Required:

1. Calculate the company's weighted average cost of capital. (5 Marks)
2. Calculate the net present value (NPV) of the planned purchase of the new machinery and comment on its financial acceptability. (20 Marks)

SellingpriceVariablecostIncrementalfixedcostsRM650perunitRM250perunitRM250,000peryearForecastInflation50%peryear50%peryear5peryear