Semarak Enterprises is considering a new three-year expansion project and is looking closely at investing in a new machine. The project will require an investment in a new production machine for an invoice price of RM2 million, and it would cost an additional RM320,000 to properly install the machine. To properly operate the machine, inventory must be increased by RM250,000. To purchase the new machine, the firm would have to borrow RM500,000 at 5% interest rate from Private Bank resulting in additional interest payment of RM25,000 per year. The machine will be depreciated straight-line to zero over its three-year tax life, after which time it will be sold for RM180,000. The company also hired a marketing firm to analyse the market at a cost of RM15,000. An extract of the marketing report is as follow: -The project is estimated to generate RM1.735 million in annual sales, with costs ofRM650,000. -The required return on the project is 12 percent and the tax rate is 21 %.

Semarak Enterprises is considering a new three-year expansion project and is looking closely at investing in a new machine. The project will require an investment in a new production machine for an invoice price of RM2 million, and it would cost an additional RM320,000 to properly install the machine. To properly operate the machine, inventory must be increased by RM250,000. To purchase the new machine, the firm would have to borrow RM500,000 at 5% interest rate from Private Bank resulting in additional interest payment of RM25,000 per year. The machine will be depreciated straight-line to zero over its three-year tax life, after which time it will be sold for RM180,000. The company also hired a marketing firm to analyse the market at a cost of RM15,000. An extract of the marketing report is as follow: -The project is estimated to generate RM1.735 million in annual sales, with costs ofRM650,000. -The required return on the project is 12 percent and the tax rate is 21 %.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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