HM 241 6B

GROUP MEMBERS:
Esther Kichi
Ismafateha Binti Ismail
Nadia Binti Nor Azlan
Nor Farhana Binti Usamah
Nurul Amiza Nadhirah Binti Rashid
Chapter 7: Project Analysis and Evaluation
Question 5
Gentong Lowsand is considering purchasing a new machine worth RM 3,500,000 to upgrade
the obsolete machine. The capital invested is based on 40% long-term with 8% interest and
60% Equity Financing with 40% dividend payout. The company expects the machine to have 8year useful life with RM 300,000 scrap value.
Based on the feasibility of the new machine, the company expects sales to be 5,000 units per
year, price per unit is RM440; variable cost is 35% of selling price; and fixed cost of RM
280,000. It is estimated that the required rate of return is 12% and the tax rate is set at 30% per
annum. The company assumes that projections given are accurate to within 5%.
i)
ii)
iii)

What are the upper and lower bounds for these projections?
What is the cash flow for base, best, and worst-case scenario?
What are the NPV for base, best, and worst-case scenario?

Answer:
Step 1:
Base Case
(RM)
Unit Sales
Price per unit
Variables cost per unit
Fixed cost per year

5,000
440
154
280,000

Lower Bound

Upper Bound

(RM)

(RM)

- 5%
4,750
418
146.30
266,000

+ 5%
5,250
462
161.70
294,000

Lower Bound

Upper Bound

(RM)

(RM)

- 5%
4,750 (Worst)
418 (Worst)
146.30 (Best)
266,000 (Best)

+ 5%
5,250 (Best)
462 (Best)
161.70 (Worst)
294,000 (Worst)

Step 2:
Depreciation = (Cost Trade-in value) / Useful life
= (RM 3,500,000 RM 300,000) / 8
= RM 3,200,000 / 8
= RM 400,000
Step 3:
Base Case
(RM)
Unit Sales
Price per unit
Variables cost per unit
Fixed cost per year

Sales (Unit x Price)

(-) Variable Cost

5,000
440
154
280,000

Base-case
5,000 x 440
2,200,000
5,000 x 154

Worth-case
4,750 x 418
1,985,500
4,750 x 161.70

Best-case
5,250 x 462
2,425,500
5,250 x 146.30

Contribution Margin
(-) Fixed Cost
(-) Depreciation
Operational Margin
(-) Tax @ 30%
Operational Income
(+) Depreciation
Cash Flow

(770,000)
1,430,000
(280,000)
(400,000)
750,000
(225,000)
525,000
400,000
925,000

(768,075)
1,217,425
(294,000)
(400,000)
523,425
(157,027.50)
366,397.50
400,000
766,397.50

(768,075)
1,657,425
(266,000)
(400,000)
991,425
(297,427.50)
693,997.50
400,000
1,093,997.50

Step 4:
Base-case NPV

= [(925,000 x 4.968) + (300,000 x 0.404)] 3,500,000

= (4,595,400 + 121,200) 3,500,000
= 4,716,600 3,500,000
= RM 1,216,600

Best-case NPV

= [(1,093,997.50 x 4.968) + (300,000 x 0.404)] 3,500,000

= (5,434,979.58 + 121,200) 3,500,000
= 5,556,179.58 3,500,000
= RM 2,056,179.58

Worst-case NPV

= [(766,397.50 x 4.968) + (300,000 x 0.404) 3,500,000

= (3,807,462.78 + 121,200) 3,500,000
= 3,928,662.78 3,500,000
= RM 428,662.78

Conclusion: From the above projection, it shows that the outcomes of the analysis are all
positive. Gentong Lowsand no needs to revise the financial information of the projects in terms
of increasing price and reduce the costs.