Calculate the annual cash flows of the project

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Reference no: EM132550651

Question:

Maju Construction (MCo) Sdn. Bhd. is bidding on a contract to build four tiny camping house (TCH) a year for the next three years for Sintokian campsite. Each TCH will be sold at the price of P. The project requires the purchase of RM132,000 of equipment which will be depreciated using simplified straight-line depreciation to a zero book value over the three years. The equipment can be sold at the end of the project for RM80,000. MCo will also need RM32,000 in net working capital over the life of the project. The fixed costs will be RM36,000 a year and the variable costs will be RM176,000 per TCH. MCo required rate of return is 14% for this project and the tax rate is 24%. Based on the information given:

Purchase price = RM 132,000
Selling price = RM 80,000
NWC = RM 32,000
Fixed cost = RM 36,000
Variable cost = RM 176,000

(i) Calculate the initial outlay of the project.

ITEMS	RM
Purchase price	132,000 132
(+) Net working capital	32,00032,00
Net Initial Outlay	164,000

(ii) Calculate the annual cash flows of the project.

iii) Calculate the terminal cash flows of the project.

iv) What is the minimum amount that MCo should bid per TCH if the company required NPV of RM20,000 on this project?

b) 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

MachineX

MachineY

-RM2,000,000

-RM200,000

-RM2,500,000

-RM210,000

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.

c) 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: EM132550651

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