Capital Budgeting Exercise Topic 6.doc - EXERCISE ON TOPIC 6 The Wonderful Dreamland Berhad is considering two mutually exclusive mattress assemblers

# Capital Budgeting Exercise Topic 6.doc - EXERCISE ON TOPIC...

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EXERCISE ON TOPIC 6 The Wonderful Dreamland Berhad is considering two mutually exclusive mattress assemblers. Assembler A has a purchase price of RM80,000, installation costs of RM5,000 and shipping plus insurance cost of RM2,000. To enable staffs operate the machine, additional cost of RM2,000 for training is also needed. The machine will be depreciated over its five year life using the simplified straight-line method. By using the assembler A, sales and cost of maintenance are expected to increase by RM80,000 and RM10,000 annually over the life of the machine respectively. The defect costs will fall by RM10,000 per year. The increasing sales is expected to require additional net working capital of RM20,000. The firm expects to be able to sell the machine for RM20,000 at the end of its life. The annual financing cost is expected to be RM4,100. The purchase price of assembler B is RM130,000. The total amount of other related costs

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Unformatted text preview: which needs to be considered is RM20,000. The requirement for net working capital at the beginning of its operation is RM22,000. The machine will be depreciated over its six year life using the simplified straight-line method. By using the assembler B, sales and cost of maintenance are expected to increase by RM90,000 and RM15,000 annually over the life of the machine respectively. The defect costs will fall by RM12,000 per year. The assembler B is expected to be sold at the end of the project for RM30,000. The annual financing cost is expected to be RM5,600. In order to purchase the new mattress assembler, it appears that the firm would have to borrow 30 percent of the assembler's purchase price from local bank at 5 percent interest rate. The firm's tax rate is 26% and its required rate of return is 10%. Based on an equivalent annual annuity (EAA) method, which assembler should be purchased?...
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• Spring '16
• Allan Mesina

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