Question
You have been appointed as the new CFO (Chief Financial Officer) for AMSB Berhad. AMSB is a manufacturing company. As the new CFO, you are
You have been appointed as the new CFO (Chief Financial Officer) for AMSB Berhad. AMSB is a manufacturing company. As the new CFO, you are tasked to look into the capital budgeting of the company. It is faced with the following investment opportunity; AMSB can open a new processing unit at an immediate, initial expense of RM50,000. The new unit would generate increases in (end-of-year) revenues for the next 10 years after which the plant would be obsolete. In year one the revenue increase would be RM7,500. This figure would rise by 10% per annum in years 2 to 5 of the project, by 5% in years 6 to 8 and 2% in years 9 and 10. The plant would also increase costs, however. Extra labour and raw material costs in year 1 of the project would be RM2,300. These costs would rise by 5% per annum throughout the units useful life. Extra rental costs of RM450 per year would also be incurred throughout the units lifetime. Using the above data, calculate the project NPV assuming that the relevant discount rate is 10%. Should AMSB undertake the project?
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