# Problem Set Project Evaluation.docx - Class Exercises Topic...

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Class ExercisesTopic 1: Cash Flow EstimationQuestion 1MultiAlpha is considering replacing an old machine with a new one.Two months ago their chief engineercompleted a training workshop on the new machine’s operation and efficiency.The cost of RM4000 costfor this workshop session has already been paid.If the new machine is purchased, it would requireRM5000 in installation and modification costs to make it suitable for operation in the factory.The old machine originally cost RM90000 five years ago and is being depreciated by RM15000 per year.The new machine will cost RM80000 before installation and modification.It will be depreciated byRM5000 per year.The old machine can be sold today for RM10000.The marginal tax rate for the firm is28%.Compute the relevant initial outlay in this capital budgeting decision.Question 2Cherry Flavour Company is considering the purchase of a packaging machine. The purchase price of themachine is RM80,000, plus an additional RM1,500 to ship and RM25,000 to install. The new machine willhave a 5-year useful life and will be depreciated to zero using the straight-line method.The machine is expected to generate new sales of RM40,000 per year and is expected to save RM15,000per year in labour expenses over the next 5-years. However, the production costs will also go up byRM3,000 every year. Upon buying the machine, it requires inventories to increase by RM20,000 andaccounts payable increase by RM10,000. The change in Net Operating Working Capital is expected to befully recovered at year 5. The machine is expected to have a disposal valueof RM30,000. Cherry FlavourCompany uses an 8% discount rate for capital budgeting purposes and the firm's income tax rate is 40%.a)Calculate the project initial outlay.b)What is the NPV of the proposed project?c)Should Cherry Flavour Company proceed with the project?a)Asset cost80,000CA= inventories- 20,000CL= AP-10,000+ Shipping1,500+Installation25,000Total cost106,500+Change im NOWC10,000INTIAL OUTLAY = RM 116,500b)YEAR 1YEAR 2YEAR 3YEAR 4YEAR 5sales40,00040,00040,00040,00040,000+ Dec Labour15,00015,00015,00015,00015,000-Inc product3,0003,0003,0003,0003,000Inc Revenue52,00052,00052,00052,00052,000-net dep21,30021,30021,30021,30021,300Earn B4 Tax30,70030,70030,70030,70030,700-Tax payable12,28012,28012,28012,28012,280Earn after tax18,42018,42018,42018,42018,420+dep21,30021,30021,30021,30021,300Cash in flow39,72039,72039,72039,72039,720X PVIF 8%, n0.92590.85730.79380.73500.6806
Dis.cash flow

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Term
Summer
Professor
NoProfessor
Tags
Generally Accepted Accounting Principles