Dinar Berhad is located in Bayan Lepas where a market is held regularly. It decided to buy a bus to take passengers to and from the market. It is estimated that 200 tickets could be sold a day for RM4 each. Dinar Berhad intended to run the bus for three years. It had the option of buying a newer bus, bus A, or an older bus, bus B. Dinar Berhad knew that the older bus would be less reliable and there would be more days each year when the bus could not run because of breakdowns and maintenance. It would also require more money to be spent on repairs.

The following estimated information was available.

Bus A Bus B

Initial purchase price RM86,000 RM45,000

Sale proceeds at the end of year 3 RM28,000 Nil

Days lost to breakdowns and maintenance

Year 1 5 12

Year 2 9 15

Year 3 16 17

Costs of repairs and maintenance

Year 1 RM7,000 RM9,000

Year 2 RM8,000 RM14,500

Year 3 RM11,000 RM17,000

Other running costs were expected to be the same for both buses. Dinar Berhad uses a cost of capital of 10%.

a) Calculate the difference in NPV between purchasing bus A and bus B. 

b) Assuming that the NPV for bus A is RM18,900, calculate the NPV of purchasing bus B. 

Additional information:

Assume that the Accounting Rate of Return (ARR) of purchasing bus A was calculated as 24.56%. The total net cash flows of years 1 to 3 inclusive for bus B amounted to RM74,300.

c) Calculate the ARR of purchasing bus B. 

d) Advise Dinar Berhad which bus it should buy. Justify your answer. 

e) State one method of investment appraisal (other than NPV and ARR) that a business could use.

Answer rating: 100% (QA)

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