v) (a) The company management assigns you to evaluate a proposal related to the production of an electronic device 'X' based on a suitable financial model, considering all discount rates. The management provides you with the following information and expects the rate of return of 20%: i) An initial investment of RM455, 000 to purchase test equipment. ii) An additional cost to install two (2) machines after one year, with RM50,000 per machine. iii) The electronic parts will be ordered on the second year of project, with an estimated cost of RM70,000. iv) The production is expected to begin in the third year, with an additional labor cost of 1000 hours at the rate of RM45 per hour. All machines are expected to undergo maintenance every two years, starting in the second year of production, with a maintenance cost of RM50,000. The machines would not be sent for maintenance in the last year of project life. vi) Project life is expected to be ten (10) years. vii) Projected profits are estimated to be RM275, 000 every year for the first three (3) years of production. viii) In the fourth year of production, the profits declined to RM200, 000 every year until the project ended. ix) The machinery will have a salvage value of RM185, 000. x) The inflation rate is expected to be 1%. You need to advise the top management whether the company should fund the project. The decision shall be based only on financial information. Provide justifications and complete evidence of the basis of your advice. (10 marks) (b) A supplier offered to supply electronic parts with a cost of 50% cheaper than the above proposal. However, the project life is expected to be extended to twelve (12) years due to the procurement delay. The profits are expected to be the same (as previous) for that extended years, and machine maintenance costs can be neglected after the last maintenance. What would happen to the Net Present Value (NPV) and comment whether the decision shall be changed. (10 marks) v) (a) The company management assigns you to evaluate a proposal related to the production of an electronic device 'X' based on a suitable financial model, considering all discount rates. The management provides you with the following information and expects the rate of return of 20%: i) An initial investment of RM455, 000 to purchase test equipment. ii) An additional cost to install two (2) machines after one year, with RM50,000 per machine. iii) The electronic parts will be ordered on the second year of project, with an estimated cost of RM70,000. iv) The production is expected to begin in the third year, with an additional labor cost of 1000 hours at the rate of RM45 per hour. All machines are expected to undergo maintenance every two years, starting in the second year of production, with a maintenance cost of RM50,000. The machines would not be sent for maintenance in the last year of project life. vi) Project life is expected to be ten (10) years. vii) Projected profits are estimated to be RM275, 000 every year for the first three (3) years of production. viii) In the fourth year of production, the profits declined to RM200, 000 every year until the project ended. ix) The machinery will have a salvage value of RM185, 000. x) The inflation rate is expected to be 1%. You need to advise the top management whether the company should fund the project. The decision shall be based only on financial information. Provide justifications and complete evidence of the basis of your advice. (10 marks) (b) A supplier offered to supply electronic parts with a cost of 50% cheaper than the above proposal. However, the project life is expected to be extended to twelve (12) years due to the procurement delay. The profits are expected to be the same (as previous) for that extended years, and machine maintenance costs can be neglected after the last maintenance. What would happen to the Net Present Value (NPV) and comment whether the decision shall be changed. (10 marks)
