NF Power Berhad (NFB) is a listed firm in utility industry since its initial public offering in
Question:
(a) As environmental issues increasingly affect the economy, NFB is committed to its investment strategies which are carried out in a sustainable manner. Driven by this commitment, NFB plans to expedite the identification and repair of leaking valves in all power stations. The expedition known as NFE are expected to provide greater efficiency and reduce the amount of water being consumed by almost 50 percent after the completion of NFE in three years. The upfront cost for NFE is estimated to be RM5 million. The engagement of NFE is expected to increase the production cost savings by RM1.5 million for the first year, RM3.3 million the second year, and RM4.8 million the final year.
The overall weighted average cost of capital (WACC) of NFB is 12 percent. The systematic risk of NFE is similar to the NFB as a whole. As the power stations obtained ISO 140001 (Environmental Management Systems) certification recently, NFB enjoys the special tax exemption for NFE as an approved energy-saving investment.
Using net present value (NPV) and internal rate of return (IRR) techniques, evaluate the NFE and recommend to NFB whether it is a rational decision to proceed with the expedition.
Andersons Business Law and the Legal Environment
ISBN: 978-1133587583
22nd edition
Authors: David P. Twomey, Marianne M. Jennings