Reference no: EM133132961
Question - OSK Berhad (OSK) is considering introducing a new product in the market. To evaluate the project proposal, its Chief Financial Officer has collected the following information:
The new product is expected to be sold in the market for four years where after four years, the product will no longer be marketed.
To produce the product, OSK needs to buy a new equipment worth RM660,000 in the early year.
The new equipment will be depreciated using the MACRS method as shown in the table below:
|
Tahun / Year
|
MACRS Kadar Susut Nilai / MACRS Depreciation Rate (%)
|
|
1
|
33
|
|
2
|
45
|
|
3
|
15
|
|
4
|
7
|
This equipment will be sold at a market value (salvage value) of RM180,000 at the end of the fourth year.
The company is also expected to spend RM120,000 on marketing activities in the first year this product is marketed.
At the initial stage, the company also needs an increase in operating net working capital of RM44,000. Assume that the additional operating net working capital will be fully recovered at the end of the fourth year.
The new product is expected to generate sales as follows:
|
Tahun pertama / First year
|
RM220,000
|
|
Tahun kedua / Second year
|
RM260,500
|
|
Tahun ketiga / Third year
|
RM380,500
|
|
Tahun keempat / Fourth year
|
RM130,000
|
OSK has a tax rate of 24% and the cost of capital for the new product project is 12%.
a) Calculate the net present value and regular payback period of the project.
b) Should OSK continue the project based on net present value? Why?