50.1K

Verified Solution

Link Copied!

Question Four A printing company is considering investing in new equipment which has a capital cost of RM 3 million. The machine qualifies for depreciation at the rate of 20% per year on a reducing balance basis and has an expected life of five years. The residual value of the machine is expected to be RM 300,000 at the end of five years. An existing machine would be sold immediately for RM 400,000 if the new machine were to bebought. This existing machine has a net book value of RM 250,000. The existing machine generates annual revenues of RM 4 million and earns a contribution of 40% of sales. The new machine would reduce unit variable costs to 80% of their former value and increase output capacity by 20%. There is sufficient sales demand at the existing prices to makefull use of this additional capacity. The printing company pays corporation tax on its profits at the rate of 25%, with half of the tax being payable in the year that the profit is earned and half in the following year. The company's after tax cost of capital is 15% per year. Required: (a) Evaluate the proposed purchase of the new printing machine from a financial perspective using appropriate calculations, and advise the company as to whetherthe investment is worthwhile. (8 marks) (b) Explain sensitivity analysis and prepare calculations to show the sensitivity of thedecision to independent changes in each of the following: (i) annual contribution; (ii) rate of corporation tax on profits

Answer & Explanation Solved by verified expert

See Answer