INSTRUCTION: Answer ALL questions. Total Marks: 100

AcePearl Sdn. Bhd. has developed a new battery operate hand drill. It would cost RM1,000,000 to buy the equipment necessary to manufacture the drills, and it would require net operating working capital equal to 10% of sales in the initial year. The project would have a life of 5 years. If the project is undertaken, it must be continued for the entire 5 years.

The firm believes it could sell 7,000 units per year. The drills would sell for RM350 per unit and that variable costs would amount to RM200 per unit. The companys non-variable costs would be RM125,000 at Year 1 and would increase with inflation. After the first year, the sales price and variable costs will increase at the inflation rate of 3.5%.

The equipment would be depreciated over a 5-year period, using the straight-line method. The estimated market value of the equipment at the end of the projects 5-year life is RM150,000. The tax rate is 25%

Also, the projects returns are expected to be highly correlated with returns on the firms other assets. Its cost of capital is 10% for average-risk projects, defined as projects with a coefficient of variation of NPV between 0.8 and 1.2. Low-risk projects are evaluated with a WACC of 8% and high-risk projects at 13%.

Question 5 (CLO3)

On the basis of information in the problem, would you recommend that the project be accepted? (15 Marks)