QUESTION 2

a) Consider a capital expenditure project that has forecasted revenues equal to RM32,000 per year; cash expenses are estimated to be RM29,000 per year. The cost of the project equipment is RM23,000, and this equipment can be sold at market value of RM9,000 at the end of the project. The equipment's RM23,000 cost will be depreciated on a straight-line basis to RM0 (no salvage value) over a 10-year estimated economic life. Assume that the project requires an initial RM7,000 working capital investment and these cost will recover at the end of the project. The company's marginal tax rate is 25%. The project's required rate of return is 12%

i) Calculate the initial cost (t=0) for this project

ii) Calculate the after tax cash flow at the end of the first year to at the end of year nine

iii) Calculate the after tax cash flow at the end of year ten

iv) Based on the Net Present Value and Internal Rate of Return approaches, can we accept this project?

b) Seri Meranti expects to sell 9,000 units, plus or minus 4 percent. Other information of the project : the expected variable cost per unit is RM9 and the expected fixed costs is RM325,000. The fixed and variable cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is RM90,000. The tax rate is 25 percent. The sales price is estimated at RM70 per unit, within a plus or minus 4 percent range. The cost of capital is 10% Calculate:

i) Calculate the operating cash flow under the best case scenario

ii) Net present value and internal rate of return under the best case scenario