Question 3: Bow Berhad is evaluating a new capital expenditure project. The details are as follows:
1. The project requires an immediate cost of RM2,100,000 and a residual value of RM15,000.
2. Sales are expected to be RM1,550,000 per annum for years 1 to 3, falling to RM650,000 per annum for the two years after that. No further sales of the product are expected after the end of this five-year period.
3. Cost of sales is 40% of sales.
4. Distribution costs represent 10% of sales.
5. Administrative costs are 5% of sales.
6. The company's cost of capital is 10%.
Discount factors:
Year 10% 12%
1 0.909 0.893
2 0.826 0.797
3 0.751 0.712
4 0.683 0.636
5 0.621 0.567
Required:
Calculate, in relation to the investment project, the:
(i) Net Present Value (NPV) @ 10% (15 marks)
(ii) Internal Rate of Return (IRR) to the nearest percent. (10 marks)
(iii) Comment on the financial viability of this capital expenditure project.