Zeliens Smart-Tech is considering purchasing a new super-power computer system to improve the data analysis in their Research and Development. Two types of system are available on the market and the company plans to use the service of either system not more than ten years. The purchase and installation of Supercomputer A is RM 30,000. The annual maintenance cost for this system is RM 2,000 per year and to make sure the system runs effectively, the parts of the system must be changed three times per year, which costs them RM 800 for each replacement. The system would last for five years; at which time it should have no more salvage value. Supercomputer B will cost them RM 40,000. This system has a special requirement during installation. This requirement will require additional software installation and is estimated to cost RM 3,000. The useful life for this system is 10 years with a market value of only 25% from the initial value at the end of life. This system has a special offer from the supplier: Free maintenance cost for one year and the annual maintenance cost of RM 2,200 starts at year 2 until year 10. The annual operating cost for both systems are shown in Table 3. In addition, the company has another option of renting a Standalone Technology System (STS) for RM 13,000 per year with the rental cost increasing by 5% per year. The system is fully maintained by the rental company. Based on the above information: (a) Suggest, with justifications, THREE (3) alternatives available to the company to have a new super-power computer for 10 years including the cash flow diagram illustration. (b) Recommend which alternative appears to be the best at MARR of 10% per year considering Present Worth Method.
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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