Reference no: EM132917710

Question - M-tech is a Malaysian mobile phone company who manufactures and sells smart phones in its domestic market. The company is currently considering expanding its business into tablet PC markets. According to the recent report from M-tech's R&D department, the firm is well capable of utilizing its current technology for making tablet PCs. The investigation costs related to this report was 1.2 million RM. The company has named this potential new product M-pad.

The marketing department forecasts that at the price of 2,000 RM per unit the annual sales volumes for M-pad will be 50,000 units during the first year after its launch to the market and 40,000 during year 2. At the end of the second year, an update to M-pad's hardware system is to be expected at additional R&D cost of 10 million RM. Following the update, M-pad sales is expected to continue for three more years with 40,000 units in year 3 and 30,000 units each year for year 4 and year 5. At the end of year 5, M-pad will be replaced by next generation tablets. The production department estimates that new machinery will be purchased immediately for production which costs 20 million RM. Depreciation of this machinery will be on straight-line basis over 10-year period with a remaining scrape value (expected sales price) of 5 million RM at the end of the 5-year period. A factory building the company currently owns will be used for production of M-pad. Previously this building has been rented to a textile company for 5 million RM per year. The variable cost of production per unit will be 1,000 RM in year 1 and 800 RM in year 2. Due to the expected system update, this cost will be 1,100RM/1,000RM/900RM in years 3/4/5, respectively. Other fixed production costs will be 15 million RM per year during the 5 years.

Currently, the weighted average cost of capital for the firm is 15%. The launch of M-pad is in line with the company's strategy to diversify its business lines which according to the financial analyst in the capital budgeting department will reduce the firm's weighted average cost of capital to 12%. Working capital of 8 million RM will be required immediately to start production if pursuing the project. The same amount of working capital will be liquidated (sold) at the end of year 5. The corporate tax rate is 25% in Malaysia. All RM values, prices, and interest rates appeared above are nominal (adjusted for inflation).

Requirement - Calculate the project NPV for capital budgeting purpose and assess the viability of this M-pad project. Provide necessary interpretations of your workings.