Question 1 The financial manager of Tepung Berhad, Encik Danial, is considering a project which requires an investment of RM53,000 in a machine. This machine in which will improve the performance and production quantities of the company's range of biscuits. At the end of the five-year period, this machine will be scrapped. Encik Danial expects that this project will lead to increased sales for the next five years as follows: Year 1 Sales ('000 units) 2 3 4 5 800 900 1,000 1,100 1,200 The selling price per unit is RM20. Labor and utilities costs are estimated to be RM8 and RM4 per unit respectively. The project requires an increase in net working capital of RM10,000 in the initial year and will be fully recovered at the end of the project. The company's required return on investment of 15%. Encik Danial thinks that the unit sales, selling price, labor, and utilities cost projections are accurate to within 15%. Note: The calculation on depreciation, fixed cost and the effect on tax is ignored for this question. From the given information, you are required to answer the following questions. a. Determine the upper and lower bounds on unit sales, selling price, labor, and utilities cost for this projection. b. Based on your answer in part (a), prepare the Cash Flows Analysis clearly showing the Net Present Value (NPV) for the best and worst-case scenario. c. Based on the NPV in part (b), explain your findings to Encik Danial.
Question 1 The financial manager of Tepung Berhad, Encik Danial, is considering a project which requires an investment of RM53,000 in a machine. This machine in which will improve the performance and production quantities of the company's range of biscuits. At the end of the five-year period, this machine will be scrapped. Encik Danial expects that this project will lead to increased sales for the next five years as follows: Year 1 Sales ('000 units) 2 3 4 5 800 900 1,000 1,100 1,200 The selling price per unit is RM20. Labor and utilities costs are estimated to be RM8 and RM4 per unit respectively. The project requires an increase in net working capital of RM10,000 in the initial year and will be fully recovered at the end of the project. The company's required return on investment of 15%. Encik Danial thinks that the unit sales, selling price, labor, and utilities cost projections are accurate to within 15%. Note: The calculation on depreciation, fixed cost and the effect on tax is ignored for this question. From the given information, you are required to answer the following questions. a. Determine the upper and lower bounds on unit sales, selling price, labor, and utilities cost for this projection. b. Based on your answer in part (a), prepare the Cash Flows Analysis clearly showing the Net Present Value (NPV) for the best and worst-case scenario. c. Based on the NPV in part (b), explain your findings to Encik Danial.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Question 1
The financial manager of Tepung Berhad, Encik Danial, is considering a project which requires
an investment of RM53,000 in a machine. This machine in which will improve the performance
and production quantities of the company's range of biscuits. At the end of the five-year period,
this machine will be scrapped.
Encik Danial expects that this project will lead to increased sales for the next five years as follows:
Year
1
Sales ('000 units)
2
3
4
5
800
900
1,000
1,100
1,200
The selling price per unit is RM20. Labor and utilities costs are estimated to be RM8 and RM4 per
unit respectively. The project requires an increase in net working capital of RM10,000 in the initial
year and will be fully recovered at the end of the project. The company's required return on
investment of 15%.
Encik Danial thinks that the unit sales, selling price, labor, and utilities cost projections are
accurate to within 15%.
Note: The calculation on depreciation, fixed cost and the effect on tax is ignored for this question.
From the given information, you are required to answer the following questions.
a. Determine the upper and lower bounds on unit sales, selling price, labor, and utilities cost for
this projection.
b. Based on your answer in part (a), prepare the Cash Flows Analysis clearly showing the Net
Present Value (NPV) for the best and worst-case scenario.
c. Based on the NPV in part (b), explain your findings to Encik Danial.
AI-Generated Solution
AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.
Unlock instant AI solutions
Tap the button
to generate a solution
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education