Pearl Holdings a manufacturer of fiberglass wires was offered a 5-year contract to supply TMI with...

Transcribed Image Text:

Pearl Holdings a manufacturer of fiberglass wires was offered a 5-year contract to supply TMI with valves. Should Pearl accept the contract it would need to invest in new machinery and working capital. TMI has agreed to purchase the following units for each of the 5 years at prices as shown. Year 1 2 3 4 5 Units 3 million 3.1 million 3.3 million 3.5 million 3 million Price per unit RM 20 RM 15.50 RM 12.00 RM 13.50 RM 14.00 Given the following information, you are asked to recommend if Pearl should accept the contract. • Purchase price of the new machine • Salvage value of machine Depreciation method value . Working capital investment (Assume fully recovered at the end of the project) • Variable cost per unit RM 6 • Fixed cost excluding depreciation RM 3 million • Company tax rate 30% 10% RM 12 million RM 3 million Straight line to salvage • Average KLCI • Krf = 4% and = 3.2 Cost of debt • Capital structure 48% Debt, 75% Equity RM 5 million 6% Pearl Holdings a manufacturer of fiberglass wires was offered a 5-year contract to supply TMI with valves. Should Pearl accept the contract it would need to invest in new machinery and working capital. TMI has agreed to purchase the following units for each of the 5 years at prices as shown. Year 1 2 3 4 5 Units 3 million 3.1 million 3.3 million 3.5 million 3 million Price per unit RM 20 RM 15.50 RM 12.00 RM 13.50 RM 14.00 Given the following information, you are asked to recommend if Pearl should accept the contract. • Purchase price of the new machine • Salvage value of machine Depreciation method value . Working capital investment (Assume fully recovered at the end of the project) • Variable cost per unit RM 6 • Fixed cost excluding depreciation RM 3 million • Company tax rate 30% 10% RM 12 million RM 3 million Straight line to salvage • Average KLCI • Krf = 4% and = 3.2 Cost of debt • Capital structure 48% Debt, 75% Equity RM 5 million 6%

Answer rating: 100% (QA)

To determine whether Pearl Holdings should accept the contract we need to calculate the net present value NPV of the project The NPV will indicate whe... View the full answer