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Aurora Berhad is a manufacturing company which operated its business at Sungai Buloh, Selangor. Currently, the company is considering purchasing a highly sophisticated machine in
Aurora Berhad is a manufacturing company which operated its business at Sungai Buloh, Selangor. Currently, the company is considering purchasing a highly sophisticated machine in order to expand their business. Amongst choices of machines, Aurora shortlisted two pieces of machine based on their production capacity and time saving. The company will have to choose the best only one machine out of the choices available. The information Aurora has accumulated regarding the machines as follow: Cost of machine Increased annual contribution margin Life of the machine Required rate of return Machine A RM1,200.000 RM300 000 10 years Machine B RM900.000 RM150,000 8 years 10% 10% Aurora estimates they will be able to produce more production using the new machine and thus increase their annual contribution margin. They also estimate there will be a small disposal value of the machine, but the cost of removal will offset that value. Income tax issues is ignored. Assume all cash flows occur at year-end except for initial investment amounts. Required: (Show all calculations) a) Calculate the payback period for each machine and give your comments on the analysis b) Calculate the net present value for each machine and give your comments on the analysis. (Present value table on page 2) c) Apply the five stages of capital budgeting process which can be used by Aurora Berhad in choosing the machine
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