Suasa Bhd is planning to launch a new product which requires the company to replace one of its existing machines.
Suasa Bhd is planning to launch a new product which requires the company to replace one of its existing machines. The new machine would cost RM800,000 and requires an installation cost, modification cost and shipping cost of RM30,000, RM50,000 and RM10,000, respectively. The company has sent its employees for the necessary training to operate the machine at a cost of RM8,000. To assess the likely demand for the new product, a market survey was recently commissioned at a cost of RM5,000.
If the replacement takes place, the company would have to increase its inventories by RM60,000 and its accounts payable by RM20,000. This working capital is expected to be recovered once the machine is sold. The new machine has a useful life of 5 years and estimated to has a salvage value of RM90,000 at the end of its useful life. The company will incur RM5,000 of interest payment for the financing of the new machine. The existing machine was originally costed at RM416,000 with zero salvage value. The existing machine was already in use for 8 years and could currently be sold for RM80,000. It has a useful life of 13 years. The company uses the straight-line method in depreciating its assets.
Over its 5-years useful life, the new machine should increase the company's sales by RM140,000 per year for the first three years and additional 50% for the remaining years. The new machine is expected to increase maintenance costs by RM20,000 per annum and overhead expenses from RM130,000 to RM170,000 per year. The firm will spend RM20,000 a year in advertising the new product over the next five years.
By using the new machine, it is expected that the company can save RM40,000 per year from wastage. Every year, the company spends RM400,000 on salaries, which is forecasted to be reduced to RM320,000 per annum. The company has fixed operating costs of RM60,000. The corporate tax rate is 24% and the cost of capital is 12%. The desired payback period is four years. Ignore inflation and taxation effect.
Based on the following computations, determine whether Suasa Bhd should buy the new machine or continue using the existing machine.
a. Initial Outlay
b. Differential Cash Flow
c. Terminal Cash Flow
d. Payback Period
e. Net Present Value