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Should the production machine be purchased and explain

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Reference no: EM132594581

A manufacturer intends to purchase a new production machine costing RM700,000 (price inclusive of freight), but requires RM10,000 installation and RM40,000 training costs. Total annual running and maintenance cost amounted to RM120,000, and annual revenue generated is expected to be RM320,000. The machine has 5 years useful life and can be sold for RM100,000 after 1 year or RM50,000 in year 5. The company has an effective tax rate of 20% and cost of capital of 10% per annum.

Required:

Question a) By discounting the future after-tax cash flows, calculate the net present value (NPV) of the project.

Question b) Should the production machine be purchased?

Reference no: EM132594581

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