Nita Sdn, Bhd. (Nita) manufactures toners for use in photocopying machines. Recently Nita was awarded a 5-year contract to supply toners to all departments of the Minisfry of Defence, Government of Malaysia. To fulfil this increased demand, Nita has decided to invest in an additional state of the art manufacturing machine. This machine will cost RM45 million and qualifies for capital allowances at a reducing balance rate of 25%. This machine is expected to have a lifespan of four years and will have no residual value. Nita has decided to use its equity to finance the purchase of this machine. Nita has been provided with the fo}lowing forecast cash flows: Year 1 2 3 4 Sales revenue (RM million) 70 90 1 10 170 Costs (RM million) 60 75 95 140 Inflation of 4% per year was not taken into account in compiling the above forecast cash flows. Corporate tax of 30% is payable one year in arrears. Nita has a nominal (money tenns) after-tax cost of capital of 12% per year.

Required: (a) Calculate the net present value of the project in nominal terms and comment on its financial acceptability.  

Answer rating: 100% (QA)

To calculate the net present value NPV of the project in nominal terms we need to discount the forecasted cash flows to their present values using the ... View the full answer