Question 1 - Show your workings.
Blue Sdn. Bhd. (BSB) expects to buy a machine for RM50 million. It will cost another RM5 million to install. BSB will depreciate the machine over 10 years, (10% each year). BSB expects to make RM15 million each year in revenues. Operating costs will be RM2 million each year. The increase in working capital is expected to be RM30 million which will be reversed at the end of 10 years when BSB sold the machine. At the end of 10 years, the machine will be salvaged for RM10 million. The tax bracket is 30%.
From the above information, you are required answer the following questions.
a. Calculate the Net Present Value (NPV) with the cost of capital is 10%. Should BSB proceed with the project? (20 Marks)
b. In what situation that a firm will decide to accept a project even though the NPV is negative and which method is applicable? Discuss. (5 Marks)
(Total: 25 Marks)