Entel Corporation, a semiconductor firm, is considering investing in the production of mini personal computers, NMOS,...

 

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Entel Corporation, a semiconductor firm, is considering investing in the production of mini personal computers, NMOS, using hybrid memory technology. Entel's targeted market for this computer will be IT decision makers. Hence, the company needs a substantial capital investment of RM9 million in a new manufacturing facility at the beginning of Year 1. This facility would have a useful life of four years and could be sold for cash of RM1.36 million at the beginning of the fifth year. The manufacturing facility will be depreciated over 4 years using the straight-line method. The company is entitled to 20% initial allowance and 14% annual allowance on this facility. The sales and production of the NMOS over its life cycle (Year 1 to Year 4) are projected to be 42,000 units, 56,000 units, 75,000 units and 89,000 units respectively. It is assumed that all units produced are sold. The selling price in Year 1 will be RM1,500 per unit and the variable cost per unit will be RM690. NMOS will be exclusively produced in the new manufacturing facility. The total fixed costs in Year I will be RM4.5 million including depreciation. The selling price, variable cost per unit and fixed costs are expected to increase by 4% each year. Entel Corporation pays tax of 24% one year in arrears. The company's cost of capital is estimated to be 12% per year. It is assumed that the initial capital investment will be incurred at the beginning of the first year. Required: (a) Calculate the net present value (NPV) of the project. Show all workings. (b) Based on your answer in (a) above, explain whether Entel Corporation should proceed with the proposal to invest in the production of mini personal computers. (c) Explain THERE (3) advantages of NPV as the investment appraisal method. Entel Corporation, a semiconductor firm, is considering investing in the production of mini personal computers, NMOS, using hybrid memory technology. Entel's targeted market for this computer will be IT decision makers. Hence, the company needs a substantial capital investment of RM9 million in a new manufacturing facility at the beginning of Year 1. This facility would have a useful life of four years and could be sold for cash of RM1.36 million at the beginning of the fifth year. The manufacturing facility will be depreciated over 4 years using the straight-line method. The company is entitled to 20% initial allowance and 14% annual allowance on this facility. The sales and production of the NMOS over its life cycle (Year 1 to Year 4) are projected to be 42,000 units, 56,000 units, 75,000 units and 89,000 units respectively. It is assumed that all units produced are sold. The selling price in Year 1 will be RM1,500 per unit and the variable cost per unit will be RM690. NMOS will be exclusively produced in the new manufacturing facility. The total fixed costs in Year I will be RM4.5 million including depreciation. The selling price, variable cost per unit and fixed costs are expected to increase by 4% each year. Entel Corporation pays tax of 24% one year in arrears. The company's cost of capital is estimated to be 12% per year. It is assumed that the initial capital investment will be incurred at the beginning of the first year. Required: (a) Calculate the net present value (NPV) of the project. Show all workings. (b) Based on your answer in (a) above, explain whether Entel Corporation should proceed with the proposal to invest in the production of mini personal computers. (c) Explain THERE (3) advantages of NPV as the investment appraisal method.

Answer rating: 100% (QA)

NPV of the project Cash inflow Cash outflow Cash imflow 112398127 Cash outflow 9000000 NPV 112398127 9000000 103398127 Working note Depreciation expen... View the full answer