With the instructions he received from Abdullah, Muhammad immediately started to work on the cash flow calculations using the data in Exhibit 2 to analyse the projects profitability with the NPV and discounted payback period methods.

Exhibit 2: The data Muhammad plans to use in the calculation of the cash flows for the project and in the evaluation of its profitability

RM The Machinerys Invoice Price 56,000 Shipping Charges 1,000 Installation Cost 3,000 Depreciable Basis 60,000

Depreciation Rates: Straight-line method at 25% per year Salvage Value RM8,000 (at the end of year 4)

Annual revenue and cost estimates (assume 3% inflation rate): Year 1 Year 2 Year 3 Year 4 Units 30,000 30,000 30,000 30,000 Unit Price (RM) 12.50 _____ _____ _____ Unit Cost 6.50 _____ _____ _____ RM Sales 375,000 _____ _____ _____ Costs (195000) _____ _____ _____

This exhibit shows the data needed to calculate the cash flows for this project. The new production system has a useful life of 4 years, with a salvage value of RM8,000. The expresso coffee maker is expected to generate 30,000 cups of sales per year, with a unit selling price of RM12.50 and a unit cost of RM6.50.

QUESTION

Determine the taxable profit for the espresso coffee maker project each year until the year 4 (you can use the data and format in Exhibit 2). Your answers shall include:

Evaluate the decision to be taken for the project using Net Present Value (NPV) (assuming a 10% cost of capital)

Should the project be acceptable? Justify your answer.