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?

b) Your company would be entitled for subsidies if it signs up with the governments new green policy. How would your conclusions change if the government gave AMSB a subsidy for taking this project? Assume that the value of the subsidy is RM10,000 and that it is received at the end of year 2 of the project.

c) The board of directors of AMSB are confused between IRR and NPV. Briefly discuss the Internal Rate of Return rule used as an alternative to NPV in project evaluation. What are its strengths and weaknesses when compared to the NPV rule?