The directors of Gemilang Berhad plan to buy a new machine costing RM220,000 for making a new product. The machine will have a useful life of 4 years with no scrap value. The cash inflows and cash outflows from the new product for four years are expected to be as follows:

YEARS	INFLOWS(RM)	OUTFLOWS(RM)
YEAR 1	100000	36000
YEAR 2	132000	50000
YEAR 3	160000	68000
YEAR 4	92000	50000

The cost of capital is 8%.

(a) Calculate for the new machine:

(i) the accounting rate of return (ARR) (5 marks)

(ii) the net present value (NPV) (4 marks) (iii) the internal rate of return (IRR) using 12% cost of capital (4 marks)

(b) Advise the directors whether or not they should buy the new machine. Justify your answer. (3 marks)

(c) The directors are of the view that the NPV method should be used to make decisions on investment. State TWO (2) advantages of using the NPV method. (2 marks)

(d) Due to a change in economic conditions, the directors consider that the cost of capital should be 12%. Explain the effect on the directors’ decision on investment of the change in the cost of capital. (2 marks)

(e) The directors also consider that the negative impact from the increase of cost of capital can be offset by increasing the revenue. Additional advertising costing RM20,000 incurred in year 1 can help increase the sales revenue in years 2 and 3. Year 2 sales revenue is expected to increase by RM24,000. Calculate the minimum increase in sales revenue in year 3 to justify the directors deciding to buy the new machine.

Answer rating: 100% (QA)

a i The accounting rate of return ARR is the percentage of average accounting profit earned on an in... View the full answer