a)T&T Workshop is considering a four-year project to improve its production efficiency. Buying a new machine press
Question:
a)T&T Workshop is considering a four-year project to improve its production efficiency. Buying a new machine press for RM560,000 is estimated to result in RM210,000 in annual pre-tax cost savings. The press will be depreciated straight-line to zero over its four-year tax life. Assume the tax rate is 25 percent. Compute the operating cash flow and net present value for this new machine press. If the required return is 12 percent, should T&T Workshop buy in the new machine press? (8 marks)
b) Suppose the press also requires an initial investment in spare parts inventory of RM20,000, and the press will have a market value of RM80,000 at the end of the project. Compute the new net present value. (7 marks)
c) Suppose Antique Berhadis entering a four-year project and expected to enjoy improved growth in earnings and dividends when the project is completed. Last year, the company just paid a dividend of RM3.40. It expects zero growth in the next year. In years 2 and 3, 15 percent growth is expected, and in year 4, 12 percent growth. In year 5 and thereafter, growth should be a constant 9 percent per year. Calculate the current share price of Antique Berhadif the required rate of return is 14 percent. (13 marks)
d) Discuss the relevant incremental cash flows associated with a new project. Provide relevant examples along your discussion if applicable. (12 marks)