Determine the net present value of the contract

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Reference no: EM132594633

Tabuan Wheeling Enterprise is embarking on supplying heavy duty roller tires to contractors of the Pan Borneo.

It will involve committing capital expenditure of RM1.0 million. The investment will be for the supply of four years contract after which the plants will be disposed for RM350,000 to the Pan Borneo Contractor, when the contract ends.

The capital investment will attract capital allowance of 25 percent per year on a reducing balance method, with corporation tax at 30 percent. The opportunity cost of capital is 10 percent.

The project is going to generate cash flow of RM300,000 each year for the first 2 years and RM400,000 each year for the balance of another two years.

Required:

Question i) Annual Cash Flow after tax including the disposable value of the company when the contract ends.

Question ii) Determine the Net Present Value of the contract and to recommend if the project is economically viable.

Reference no: EM132594633

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