Reference no: EM133105811

Question - The Malako company does all of its own printing of its marketing leaflets and flyers and other advertising materials. The printing press that Malako currently is using requires a RM20,000 overhaul as a result of which it can extend the useful life of the printing press by 8 years. As an alternative, Malako could buy a brand new technologically advanced printing press for RM45,000. The new press would also last 8 years. The annual operating expenses of the old press are RM12,000. The annual operating expenses of the new press will only be RM7,000. The old press is not expected to have a salvage value in 8 years. The new press is expected to have a RM6,000 salvage value in 8 years. Malako's discount rate is 14%.

Required -

(a) Using net present value as the evaluation tool and tabulating answers, what would be the decision, to buy the new printing press or just to spent the money to overhaul the old printing press.

(b) Explain how the cost of capital serve as a screening tool when using

(i) net present value method and

(ii) the internal rate of return method.