Question 2

Old Jeans Berhad (OJB) is considering a project which requires an investment of RM100, 000 in

machinery. This machinery will be depreciated using straight-line over four years period and the

salvage value is estimated to be zero by the end of this machine useful life. The project sales

forecast for the next four years is as follows:

Year	Sales (units)
1	900
2	800
3	700
4	600

The selling price per unit is RM15 and the variable cost per unit is RM10. The project requires an

increase in net working capital of RM40,000 in the initial year and will be fully recovered at the

end of the project. The firms required return on investment of 12%.

OJB thinks that the unit sales, selling price and variable cost projections are accurate to within

10%.

Note: The calculation on depreciation, fixed cost and the effect on tax is ignored for this question.

From the given information, you are required to answer the following questions.

a. Determine the upper and lower bounds for this projection.

(4 Marks)

b. Based on your answer in part (a), prepare the Cash Flows Analysis clearly showing the Net

Present Value (NPV) for the best and worst-case scenario.

(4 Marks)

c. Based on the NPV in part (b), interpret your findings.

(2 Marks)

(Total: 10 Marks)

Subject:Corporate Finance