Question

TIME: 3 HOURS INSTRUCTIONS: (100 MARKS) Answer ALL questions in the answer booklet (25 MARKS) QUESTION 1 A Combi Bhd is considering purchasing a machine that would cost RM201,600 and has a useful life of 9 years. The machine would reduce cash operating costs by RM37,334 per annum. The machine would have a salvage value of RM30,240 at the end of the project. Required: a) Compute the payback period for the machine (3 marks) b) Compute the simple rate of return for the machine (6 marks) B. Secta Enterprise's required rate of return is 8%. The company is considering the purchase of new machines that will be indicated below. Consider the machines independently Required: a) Machine A will cost RM20,000 and have a useful life of 10 years. Its salvage value of RM1,000, and cost savings are projected to be RM3,500. Compute the machine's present value. (7 marks) b) How much will Secta Enterprise be willing to pay for Machine B if the machine promises annual cash inflows of RM8,000 per year for 5 years (3 marks) C. Briefly explain THREE (3) strengths of the payback period (6 marks)

Answer 1

Answer is given below

a) Payback period Investment Average annual inflows 201,600] 201,600 5.4 Years Simple rate of return Savings in Cash operating cost Less: Depreciation Net Income 37,334 19,040 (201,600-30240/9 18,294 b) Simple Rate of return Net Income Initial investment 18,294 9.07% 201,600 Ba) Calculation of Net present value Cash inflow (Outflow) Years Currency is RM Present PV Value of factor Cash Inflows at 8% (Outflows) 1.0000 -20,000 6.7101 23,485 0.4632 463 3,948 Net Initial investment Annual Cash inflows Salvage value at end of the useful life Net present value -20,000 3,500 1,000 1 1-10 10 b) Annual cash savings Present value factor 8% for 5 years Present value of cash inflows 8,000 3.9927 31,942 31,942 Maximum cost to pay The maximum cost that can be paid is present value of cash inflows Anything paid over this will result in negative NPV C i) ii) iii) Three strengths of Payback period Easier to calculate and simple to understand focus on liquidity and recovery of initial investment of project Reliable technique during uncertain times