The financial manager of Tepung Berhad, Encik Danial, is considering a project which requiresan investment of RM53,000 in a machine. This machine in which will improve the performanceand 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 Sales (‘000 units)1 8002 9003 1,0004 1,1005 1,200The selling price per unit is RM20. Labor and utilities costs are estimated to be RM8 and RM4 perunit respectively. The project requires an increase in net working capital of RM10,000 in the initialyear and will be fully recovered at the end of the project. The company’s required return oninvestment of 15%.Encik Danial thinks that the unit sales, selling price, labor, and utilities cost projections areaccurate 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 forthis projection. (4 Marks)b. Based on your answer in part (a), prepare the Cash Flows Analysis clearly showing the NetPresent Value (NPV) for the best and worst-case scenario. (4 Marks)c. Based on the NPV in part (b), explain your findings to Encik Danial. (2 Marks)
The
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 Sales (‘000 units)
1 800
2 900
3 1,000
4 1,100
5 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
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. (4 Marks)
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. (4 Marks)
c. Based on the NPV in part (b), explain your findings to Encik Danial. (2 Marks)
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