The invoice price of the coffee maker is RM56,000. It would require RM1,000 in shipping expenses and RM3,000 in installation costs. CHP plans to use the coffee maker for four years, and it is expected to have a salvage value of RM8,000 after that. The depreciation rate is 25% per year or uses a straight-line basis over four years. It is eligible for a 20% initial allowance and 14% annual capital allowance on a straight line basis.

From the discussion with Ms. Sylvia, the head of the marketing department, the unique expresso coffee maker would attract a new market segment and is expected to generate sales of 30,000 cups per year. It is estimated that the new product will sell for RM12.50 per unit, with an ingredient cost of RM6.50 per unit. The additional fixed cost of the project is RM41,000 per year. Due to inflation, management projects increase the sale price and cost per unit by 3% per year. The companys tax rate is 25%.

Exhibit 2: The data Muhammad plans to use in the calculation of the cash flows for the project and in the evaluation of its profitability

RM The Machinerys Invoice Price 56,000 Shipping Charges 1,000 Installation Cost 3,000 Depreciable Basis 60,000

Depreciation Rates: Straight-line method at 25% per year Salvage Value RM8,000 (at the end of year 4)

Annual revenue and cost estimates (assume 3% inflation rate): Year 1 Year 2 Year 3 Year 4 Units 30,000 30,000 30,000 30,000 Unit Price (RM) 12.50 _____ _____ _____ Unit Cost 6.50 _____ _____ _____ RM Sales 375,000 _____ _____ _____ Costs (195000) _____ _____ _____

This exhibit shows the data needed to calculate the cash flows for this project. The new production system has a useful life of 4 years, with a salvage value of RM8,000. The expresso coffee maker is expected to generate 30,000 cups of sales per year, with a unit selling price of RM12.50 and a unit cost of RM6.50.

QUESTION

Determine the taxable profit for the espresso coffee maker project each year until the year 4 (you can use the data and format in Exhibit 2). Your answers shall include:

Evaluate the decision to be taken for the project using Net Present Value (NPV) (assuming a 10% cost of capital)

Should the project be acceptable? Justify your answer.