Question 5 Uranus Şdn. Bhd is a famous shoes manufacturer in Malaysia. Recently, the management is considering to replace its old processing machine with a new sophisticated model. The old machine is bought at RM48,000 six years ago and has two years remaining. If the company sell this machine, the salvage value is RM15,000. The new machine costs RM60,000 and has remaining life of 5 years. The management believes that the new machine can produce better quality product and can achieve higher customers' satisfaction. The usage of new machine is expected to increase revenue of RM12,000 per year. Besides, it can save annual operating cost as follows. Maintenance cost RM2,000 Defect cost Operating costs Old Machine New machine RM2,500 RM1,000 RM35,000 RM3,000 RM40,000 Both machines are depreciated using simplified straight line and assuming the book value is 0. The marginal tax rate is 28% and internal rate of return is 12%. i) Calculate project's initial outlay ii) Calculate annual cash flow iii) Calculate teminal cash flow iv) Determine NPV of the project. Decide whether the company should/should not replace the old machine.

Question 5 Uranus Şdn. Bhd is a famous shoes manufacturer in Malaysia. Recently, the management is considering to replace its old processing machine with a new sophisticated model. The old machine is bought at RM48,000 six years ago and has two years remaining. If the company sell this machine, the salvage value is RM15,000. The new machine costs RM60,000 and has remaining life of 5 years. The management believes that the new machine can produce better quality product and can achieve higher customers' satisfaction. The usage of new machine is expected to increase revenue of RM12,000 per year. Besides, it can save annual operating cost as follows. Maintenance cost RM2,000 Defect cost Operating costs Old Machine New machine RM2,500 RM1,000 RM35,000 RM3,000 RM40,000 Both machines are depreciated using simplified straight line and assuming the book value is 0. The marginal tax rate is 28% and internal rate of return is 12%. i) Calculate project's initial outlay ii) Calculate annual cash flow iii) Calculate teminal cash flow iv) Determine NPV of the project. Decide whether the company should/should not replace the old machine.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are considering producing a new golf ball for sale in China to meet agr~wing demand in the country. This golf ball is less expensive to manufacture compared with a better-known brand, but it meets all requirements set by the United States Golf Association (USGA) for play at any competitive event. Production will require an initial outlay for the purchase of equipment worth $1,500,000. The equipment has a six-year life with an expected salvage value of $100,000. You already own the land on which the project will be located. The land has a current market value of $100,000, and its price is expected to grow by 5% per year. If you decide not to produce the golf balls, you will sell the land. You have also gathered the following information: You expect revenue of $500,000 per year for each year of operation. Your direct cost of producing the golf ball is expected to be 30% of the revenue. The operating cost, including marketing, is another 15% of the revenue. You will need to pay a…
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