Reference no: EM133036919
Problem - State Government of Negeri Kayangan is considering the construction of a new highway. The construction is expected to last for 10 years, with 12 percent cost of capital. Currently, the available highway did not connect the whole state. A new highway is expected to increase the domestic tourism activities due to easy access to tourist spot.
Bina Maju Sdn Bhd (BMSB) submitted the proposal to the State Government of Negeri Kayangan with the following information:
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RM
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Cost to acquire additional land for highway
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140,000
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Cost of construction
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400,000
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Cost of fence
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59,680
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Cost of highway lights
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79,200
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Annual cost of maintenance
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56,000
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Annual toll collection
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80,000
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In addition, to start the construction of the highway, a machine needs to be replaced with the cost of RM200,000. The old machine can be sold for RM20,000. The new machine will cost additional annual operating costs of RM24,000. On the expectation on increasing the domestic tourism, that situation will increase the state tax revenue of RM128,000 per year.
Required -
(a) Determine the internal rate of return (IRR) on the proposed highway.
(b) Recommend whether the highway should be built or not based on IRR.
(c) Prepare the net present value (NPV) on the proposed highway.
(d) Recommend whether the highway should be built or not based on NPV.
(d) One of the suggestions to State Government of Negeri Kayangan is to do a post-audit investment to ensure the highway is a beneficial project to the community. Advise THREE (3) reasons why State Government of Negeri Kayangan must invest in a post- audit.