Rex Berhad is considering buying a new production machine. The proposed machine would cost the company RM85,000 and would require an installation and modification cost of RM1,500 to be installed correctly. In addition, the new machine would require an increase in inventory and accounts payable of RM 3,000 and RM 1,700 respectively. The new machine will be depreciated over its five years of life using the simplified straight-line method. By using the new machine, sales are expected to increase by RM25,000 and the annual maintenance cost of the new machine would be 10 per cent of the incremental sales over the life of the asset. At the end of its useful life, the company expects to be able to sell the machine for RM10,000.

A. Calculate the initial outlay associated with the new machine.

B. Calculate the annual cash flow.

C. Calculate the terminal cash flow.

Should the company buy the machine? Justify your answer.

Answer rating: 100% (QA)

A To calculate the initial outlay associated with the new machine we need to consider the cost of the machine installation and modification cost incre... View the full answer