Whity Berhad bought a used printing machine 5 years ago hoping it would serve its printing needs for 10 years. Although the machine had performed as expected for the last five years, newer and more highly automated colour printers have now become available. The existing machine has a book value of RM100,000 and is being depreciated at RM20,000 a year toward a zero-salvage value in 5 years. However, today the machine can be sold for only RM50,000.

The appeal of the new machine is that it is completely automated (requires two fewer employees whose combined salaries and fringe benefits total RM110,000 per year) and also does color printing. The ability to sell color ads is expected to increase the paper ads revenues from RM150,000 per year to RM200,000. However, the added color printing feature comes at the cost of higher maintenance and ink cost of RM100,000 compared to only RM80, 000 for the older machine. The new machine being considered costs RM300,000 to purchase, plus an additional RM10,000 in shipping and installation costs. Last year, the company also spent RM3,000 to send a staff for training on the new machine. The new machine has an expected disposal value of RM100,000 in 5 years.

Whity Berhad faces a 24% marginal tax rate. The beta factor of this new investment is 2.0. The company has a target capital structure of 55% equity and 45% debt. The cost of debt after-tax is 10%. The risk-free rate is 5% and market risk is 7%.

Required:

a)Would you argue for the cost of shipping and installation, and training to be included in the calculation of initial cash outflow? Justify your answer. (3 marks)

b)What is the cost of equity for the new project? (3 marks)

c)Calculate the initial cash outflow associated with replacing the older printing machine with the new machine.(4 marks)

d)Calculate the net present value if the company decided to buy the new printing machine. (8 marks)

e)Should the company proceed with buying the new machine?