Why net operating working capital include in capital budget

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Reference no: EM132547910

PKP Sdn. Bhd. must choose between two machines, X and Y. The purchasing costs today and maintenance expenses at the end of every year for these two machines are given as follows:

Year      Machine X       Machine Y

0 -RM2,000,000     -RM2,500,000

1 -RM200,000         -RM210,000

2 -RM200,000              RM210,000

3 -RM200,000              -RM210,000

4 -                             -RM210,000

5 -                              -RM210,000

Question 1: All cash flows occur at year-end and the discount rate is 12%. Assume that revenues are the same regardless of the machine, and assume that whichever machine the company chooses, it will continue to buy that model forever. Which machine should the company choose? Tax rate is 24% and simplified straight line is used as the method of depreciation.

Question 2: Explain why net operating working capital is included in a capital budgeting analysis and how it is recovered at the end of a project's life.

Reference no: EM132547910

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