Reference no: EM132614632

Question - Projected cash flows

Years Cash Flows (RM)

1. 280,000

2. 280,000

3. 280,000

4. 280,000

5. 280,000

6. 350,000

7. 350,000

8. 350,000

9. 350,000

10. 350,000

11. 250,000

12. 250,000

13. 250,000

14. 250,000

15. 250,000

Mr Lim then questioned the fact that no costs were included in the proposed cash budget for plant facilities that would be needed to produce the new product. Miss Serene replied that at the present time, they only using 60 percent of capacity and since these facilities were suitable for use in the production of Cool Blast, no new plant facilities would be needed. Puan Annie then asked if there had been any consideration of increased working working capital need to operate the investment project. Miss Serene answered that there had, the project requires RM200,000 of additional working capital; however, as this money would never leave the firm, it was not considered an outflow

Mr Steve argued that this project should be charged something for its use of current excess plant facilities. His reasoning was that if another firm had space like that, they could generate income from rental out the area. However, Armani Berhad had a strict policy that prohibit renting or leasing any of its production facilities to any party outside the firm

Required -

a) If you were the place of miss serene would you argue for the cost of market testing to be included in a cash outflow?

b) State your opinion on how to deal with question of working capital?

c) Would you suggest that the product be charged for the use of excess production facilities and building space? Why?

d) If debt were used to finance this project, should the interest payment associated with this new debt be considered cash flow? Why?

e) Calculate the NPV of this project. Would you accept or reject this project?