Sports Indirect Berhad plans to build a new plant to manufacture a new line of sports equipment. The project requires an initial outlay of RM4 million to construct the new plant in Year 0. The company needs an additional cash outlay of RM1 million to buy machinery at the end of the first year. The plot of land on which the new plant is to be built could otherwise be rented out for RM500,000 per annum before taxes. The company has to forego this rental income if they proceed with the construction of the new plant. The production of the new line of sports equipment is expected for only three years beginning in the second year. The company will close the operations of the plant and sell it at the end of the fourth year. The forecasted sales are as follows: Sales; Year 2=500,000 units Year 3=400,000 units Year 4=100,000 units Each unit of the new sports equipment can be sold for RM30 in the second year and the price is expected to increase by 6% per year in each of the subsequent years. The raw materials required for each unit of the new sports equipment are expected to cost RM15 on average for equipment produced in the second year and this is expected to increase at a rate of 3% per year in each of the subsequent years. The labour cost per unit for producing a unit of the sports equipment is expected to be RM5 in Year 2 and this is expected to increase at a rate of 5% per year in the subsequent two years. Advertising cost for the new sports equipment is estimated to cost RM500,000 in the first year, RM220,000 in Year 2 and RM50,000 in Year 3. The company uses the straight-line method of depreciation and depreciation will start from the end of Year 1. The anticipated after-tax proceeds from the sale of the plant (together with the machinery) at the end of Year 4 is RM2 million. The company has a cost of capital of 12% for projects as risky as the new plant. The company’s tax rate is 24%. Calculate the net present value (NPV) of investing in the new plant and decide whether it is a viable project.
Sports Indirect Berhad plans to build a new plant to manufacture a new line of sports equipment. The project requires an initial outlay of RM4 million to construct the new plant in Year 0. The company needs an additional cash outlay of RM1 million to buy machinery at the end of the first year. The plot of land on which the new plant is to be built could otherwise be rented out for RM500,000 per annum before taxes. The company has to forego this rental income if they proceed with the construction of the new plant.
The production of the new line of sports equipment is expected for only three years beginning in the second year. The company will close the operations of the plant and sell it at the end of the fourth year. The
Sales;
Year 2=500,000 units
Year 3=400,000 units
Year 4=100,000 units
Each unit of the new sports equipment can be sold for RM30 in the second year and the price is expected to increase by 6% per year in each of the subsequent years. The raw materials required for each unit of the new sports equipment are expected to cost RM15 on average for
equipment produced in the second year and this is expected to increase at a rate of 3% per year in each of the subsequent years. The labour cost per unit for producing a unit of the sports equipment is expected to be RM5 in Year 2 and this is expected to increase at a rate of
5% per year in the subsequent two years. Advertising cost for the new sports equipment is estimated to cost RM500,000 in the first year, RM220,000 in Year 2 and RM50,000 in Year 3. The company uses the straight-line method of
The company has a cost of capital of 12% for projects as risky as the new plant. The company’s tax rate is 24%.
Calculate the
Step by step
Solved in 3 steps
