SV Sdn Bhd is considering to buy a giant machine which is expected to increase its factory production output and profits over an expected useful life of 5 years. The initial cost of investment of this machine is RM3,500,000. The estimated annual profits for the next 5 years, are as follows RM 200,000 400,000 700,000 550,000 300,000 Year 1 Year 2 Year 3 Year 4 Year 5 It is expected that machine will depreciate its useful lives and the company is adopting straight-line method in depreciation this machine. It is noted that the annual profits above are derived after deducting: annual depreciation, with an assumption that the residual value for the machine at the end of Year 5 shall be RM50.000. (i) (ii) annual administrative expenses of RM35,000. annual general provision for various expected write-offs. This provision was computed based on 1% of the investment value. (iii) Further information:

SV Sdn Bhd is considering to buy a giant machine which is expected to increase its factory production output and profits over an expected useful life of 5 years. The initial cost of investment of this machine is RM3,500,000. The estimated annual profits for the next 5 years, are as follows RM 200,000 400,000 700,000 550,000 300,000 Year 1 Year 2 Year 3 Year 4 Year 5 It is expected that machine will depreciate its useful lives and the company is adopting straight-line method in depreciation this machine. It is noted that the annual profits above are derived after deducting: annual depreciation, with an assumption that the residual value for the machine at the end of Year 5 shall be RM50.000. (i) (ii) annual administrative expenses of RM35,000. annual general provision for various expected write-offs. This provision was computed based on 1% of the investment value. (iii) Further information:

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

calculate net present value of this projecct

SV Sdn Bhd is considering to buy a giant machine which is expected to increase
its factory production output and profits over an expected useful life of 5 years.
The initial cost of investment of this machine is RM3,500,000. The estimated
annual profits for the next 5 years, are as follows
Year 1
Year 2
RM
200,000
400,000
Year 3
Year 4
700,000
550,000
300,000
Year 5
It is expected that machine will depreciate its useful lives and the company is
adopting straight-line method in depreciation this machine.
It is noted that the annual profits above are derived after deducting:
annual depreciation, with an assumption that the residual value for the
machine at the end of Year 5 shall be RM50.000.
(i)
(ii)
annual administrative expenses of RM35,000.
annual general provision for various expected write-offs. This provision
was computed based on 1% of the investment value.
(iii)
Further information:

Further information:
Ideally the company would like a 15% return on this investment. The following
are the present value information:
Present value
15%
10%
20%
Year 1
0.833
0.694
0.579
0.909
Year 2
Year 3
Year 4
Year 5
0.870
0.756
0.658
0.572
0.826
0.751
0.482
0.683
0.621
0.497
0.402
Required:
Calculate the net present value. internal rate of return, accounting rate of return
and payback period, net present value of the planned investment project.
a.

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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