Reference no: EM133149208

X-Cell Cookie Tree Berhad is a cookies and confectionery manufacturer located in Kuantan, Pahang. The company is currently appraising the purchase of a new sophisticated oven to replace the out-dated manual oven in order to meet the market's demand. The current oven was purchased 7 years ago at a cost of RM 656,000 excluded the transportation cost of RM 4,000. It was amortized over a 12-year period assuming no expected residual value. It is the policy of the company to depreciate all its non-current assets by using straight-line method. The company decided to sell off their current oven since it will no longer be needed if the proposal of buying the new oven is approved. The management believes that currently this specific model could be sold for RM 50,000.

The new oven would cost RM 960,000 and have an expected residual value of RM 360,000 at the end of its estimated life of 5 years. Upon acquisition, this oven requires an additional cost of RM 10,000 for transportation and RM 5,000 for training cost. In addition, import charges are expected to be RM 20,000.

With the new oven, the current operating costs of RM 580,000 would decrease by 20% per annum. The annual labour costs and defect costs will also reduce by RM 200,000 and RM 34,000 respectively. Most importantly, the annual sales are expected to increase by RM 300,000. In anticipation of increased in production, the company also needs to consider an increment of RM 70,000 in inventory, RM 130,000 in account receivable and RM 20,000 in account payable. The company is subjected to 24% tax rate and the cost of capital is 8%.

a) Determine the following cash flows associated with the proposed machine:

(i) Initial outlay

(ii) Annual differential cash flow

(iii) Terminal cash flow

b) Determine X-Cell Cookie Tree Berhad's:

(i) Net present value

(ii) Modified internal rate of return

c) Should X-Cell Cookie Tree Berhad replace the existing machine? Explain your decision.