MahaMega Bhd is considering to replace its old machine to meet the increasing demand for its...

 

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MahaMega Bhd is considering to replace its old machine to meet the increasing demand for its product. The old machine was bought 5 years ago for RM120,000. It can be used for another five years with zero salvage value. The machine can be sold now for RM50,000. The maintenance and defect costs of this machine are RM8,000 and RM6,000, respectively. per year. This machine is handled by three workers. Each worker is paid a salary and other benefits of RM15,000 per year. Only two workers will be required if the new machine is bought so the company intends to terminate one of them. A compensation of RM10,000 will be paid to him immediately on termination. The new machine costs RM200,000. Transportation cost of RM5,000 and import duties of RM15,000 will be incurred. In order to use this machine efficiently, the company has to send the two workers for training at a cost of RM10,000. The machine is expected to have a usetu life of five years with a salvage value of RM20,000. The firm would have to borrow RM100.000 at 10% interest per annum to buy this machine. This will result in an additional interest expense of RM10,000 annually. This machine will increase production speed and efficiency and therefore an additional RM30.000 of inventories will be bought immediately, of which RM20,000 will be bought in cash and the balance on credit. The annual maintenance and defect costs of the new machine are expected to be RM10.000 and RM3,000, respectively. Sales are expected to increase by RM60,000 if the new machine is used. The firm incur fixed costs of RM30,000 per year. The company uses the straight line method to depreciate its non-current assets and the cost of capital of the firm is 14%. The corporate tax is 25%. a.Calculate the project: i. Initial outlay. ii. Differential cash flows over the project's life. iili. Terminal cash flows. b. Compute the following for the new machine: i. Payback periods. ii. Net present value. iii. Internal rate of return c. Should the machine be bought? Why? MahaMega Bhd is considering to replace its old machine to meet the increasing demand for its product. The old machine was bought 5 years ago for RM120,000. It can be used for another five years with zero salvage value. The machine can be sold now for RM50,000. The maintenance and defect costs of this machine are RM8,000 and RM6,000, respectively. per year. This machine is handled by three workers. Each worker is paid a salary and other benefits of RM15,000 per year. Only two workers will be required if the new machine is bought so the company intends to terminate one of them. A compensation of RM10,000 will be paid to him immediately on termination. The new machine costs RM200,000. Transportation cost of RM5,000 and import duties of RM15,000 will be incurred. In order to use this machine efficiently, the company has to send the two workers for training at a cost of RM10,000. The machine is expected to have a usetu life of five years with a salvage value of RM20,000. The firm would have to borrow RM100.000 at 10% interest per annum to buy this machine. This will result in an additional interest expense of RM10,000 annually. This machine will increase production speed and efficiency and therefore an additional RM30.000 of inventories will be bought immediately, of which RM20,000 will be bought in cash and the balance on credit. The annual maintenance and defect costs of the new machine are expected to be RM10.000 and RM3,000, respectively. Sales are expected to increase by RM60,000 if the new machine is used. The firm incur fixed costs of RM30,000 per year. The company uses the straight line method to depreciate its non-current assets and the cost of capital of the firm is 14%. The corporate tax is 25%. a.Calculate the project: i. Initial outlay. ii. Differential cash flows over the project's life. iili. Terminal cash flows. b. Compute the following for the new machine: i. Payback periods. ii. Net present value. iii. Internal rate of return c. Should the machine be bought? Why?

Answer rating: 100% (QA)

Certainly Lets calculate each component step by step a Calculate the project i Initial outlay Initia... View the full answer