Bumi Trade Bhd (BTB) is considering to introduce one new product in the market. The Chief Financial Officer of BTB has gathered the following information for assessing the proposed project.

• The new product is expected to be sold in the market for five years. The production then will be terminated after five years..
• BTB needs to buy a new machine at a purchase price of RM 650,000 in order to produce the product..
• The installation cost of the machine is RM30,000.
• The maintenance cost of the machine is RM40,000 per annum.
• The new machine will be depreciated using the straightline method.
• The machine will be sold for RM110,000 after five years of its useful life.
• BTB will also spend about RM70,000 for promotional activities of the product in year 1.
• At the early stage, BTB needs an increase in net working capital of RM38,000. This investment in net working capital is assumed to be fully recovered in the fifth year.
• The new product is expected to generate cash sales as follows:

First year RM200,000

Second year RM220,000

Third year RM250,000

Fourth year RM300,000

Fifth year RM350,000

BTB’s WACC is 12 and corporate tax is 28%.

1. Should BTB make a decision to accept or reject this proposed project of this new product based on NPV? Show the calculation.

Answer rating: 100% (QA)

To assess whether BTB should accept or reject the proposed project of introducing the new product ba... View the full answer