QUESTION 1

Tegas Sdn Bhd, a manufacturer of automotive brake pads, has noticed an increasing trend in
defective brake pads at its Marang factory. The company currently inspects manually all
materials used in production. However this system is ineffective and the company has been
spending a significant amount every year on the rejected goods caused by sub standard
material.
The company is now considering the installation of a material scanner that will identify the
sub standard quality of material through scanning and help reduce the quantity of rejected
goods. The cost of the material scanner is RM200,000 and it is expected to operate for 5
years, after which it can be sold for RM15,000. In addition, the scanner will require the
immediate placement of a censor panel at a total cost of RM50,000. The successful
implementation of the new inspection system would require additional working capital of
RM30,000. For tax purposes, the company is entitled to a 20% initial allowance and a 10%
annual allowance.
The expected annual inflows (savings) and outflows (cost) when the material scanner is
installed are expected to be:

Maintenance cost incurred will be RM16,000 per year throughout the period.

The estimated cost savings will be RM60,000 in the first two years and will be double
this amount in the third year. The cost savings achieved in the third year will be
maintained in years 4 and 5.
Manual system will not be used anymore and the company can save RM15,000 per year.

In the early stage of the system implementation, the management expects a minor
interruption in the production flow. As a result, 8,000 units of brake pads in the first two
years cannot be completed and certain orders will have to be cancelled. The contribution
per unit earned on each brake pad is RM7.00.
The companys tax rate is 25% and the tax is payable one year in arrears. The cost of
capital is 12%.
The present value of RM1 at 12% is:
Year

1
2
3
4
5
6

0.8929
0.7972
0.7118
0.6355
0.5674
0.5066

Required:
a)

Evaluate at least three alternative methods of investment appraisal that Tegas Sdn
Bhd can use to evaluate the proposed implementation of the new material inspection
system.
(6 marks)

b)

Using the discounted cash flow technique, advise Tegas Sdn Bhd whether it should go
ahead with the proposal to invest in the material scanner.
(10 marks)

c)

The Equivalent Annual Cost (EAC) method is sometimes used in investment

appraisals. Explain what EAC indicates and in what situations will this method be
used.
(4 marks)
(Total: 20 marks)

QUESTION 2
A.

VE Tech is a high technology company that manufactures instruments for testing and
calibrating sophisticated healthcare equipment. These instruments are sold for RM3,500 each
and cost RM2,450 each to manufacture. The manufacturing process of these instruments
requires a sterile room that is created by using a spray machine. The technology used in the
manufacture of these spray machines has been changing rapidly. On January 25, 2010, VE
Tech bought the latest in electronic high-speed spray machine that allowed the company to
sterilize the room in only six hours. The company paid RM400,000 for the machine.
Recently, the manufacturer of the spray machine approached VE Tech with a new model that
would reduce the sterilization time by half. VE Techs management is considering the
acquisition of this new model and has asked Cik Norhanim, the controller, to evaluate the
financial impact of replacing the existing machine with the new model. Cik Norhanim has
gathered the following information prior to preparing her analysis.
1. The new spray machine would be installed on December 29, 2012 and placed
in service on January 2, 2013. The cost of the machine is RM608,000 and the
cost for installing, testing and debugging it will be RM12,000. The machine is
expected to have a salvage value of RM80,000 when sold at the end of four
years.
2. The current machine will be fully depreciated at the time the new model is
placed in service. If the new model is purchased, arrangements will be made to
sell the current machine for RM50,000, the estimated salvage value on
December 31, 2012. The new model is eligible for capital allowance: an initial
allowance of 10 percent and an annual allowance of 15 percent on the cost of
the machine.
3. At the current rate of production, the new machines greater efficiency will
result in annual cash savings of RM125,000.

4. VE Tech is able to sell all the instruments it can produce. Because of the
increased speed of the new model, output is expected to exceed 2012 level by
30 units in 2013, by 50 units in 2014 and 2015, and by 70 units in 2016. For
all additional units produced, the manufacturing costs would be reduced by
RM150 per unit.
5. VE Tech is subject to a 28 percent tax rate with tax being payable at the end of
each operating year. For evaluating capital investment proposals, VE Techs
management uses a 16 percent cost of capital.
Present value of RM1 is:
Period
16%

1
0.862

2
0.743

3
4
0.641 0.552

5
0.476

Required:
Determine whether VE Tech should purchase the new spray machine.
(13 marks)
B.

An increased number of companies are currently investing in advanced manufacturing

systems.
Required:
a. Many proposed advanced manufacturing systems have a negative net present
value when discounted cash flow analysis is used. Explain several reasons
behind this situation.
(4 marks)
b. Two major benefits of advanced systems are greater flexibility in the
manufacturing process and improvements in product quality. Explain how
these benefits can create problems when performing discounted cash flow
analysis.
(3 marks)
(Total: 20 marks)

QUESTION 3
Autumn High Tech Berhad manufactures premium semi-conductor chips for local and
oversea markets. Due to high demand of the product, the company is considering of an
expansion project and this would require the company to purchase a new equipment to
improve the productivity. Currently, the company uses an equipment that was purchased 4
years ago in its production. This equipment is being depreciated using straight line method
with a remaining useful life of 2 years. Its current net book value is RM20,000. The current
market value of this machine is RM25,000.

The new equipment, VEE, would cost RM200,000 with an estimated useful life of 5 years
and is expected to be sold at RM40,000 at the end of year 5. Equipment VEE will be
installed at a cost of RM12,000.
The following additional information is available to the management of Autumn High Tech
Berhad:
1.

The selling price of premium semi-conductor chip is set at RM60 per unit over the
five years. The estimated production and sales volume are as follows:
Year
Volume

1
4,000

2
5,000

3
5,400

4
6,200

5
7,000

2.

The variable cost per unit is estimated to be RM10 starting from the first year. This
cost is expected to increase each year by 5% in the second year and third year and
remain constant thereafter.

3.

The fixed costs relating to the equipment VEE consist of fixed overhead (inclusive of
maintenance cost and depreciation) of RM56,000 per year and fixed administrative
expenses of RM44,000 per year. Fixed administrative expenses will be incurred
regardless of whether equipment VEE is purchased or not.

4.

The equipment is eligible for an initial allowance of 20% and annual allowance of
10% on capital cost.

5.

The net profit of Autumn High Tech Berhad is subjected to 25% tax rate and the taxes
are paid in the current year.

6.

The companys cost of capital is 12% per annum.

Year
PV of RM1
Cumulative PV

1
0.8929
0.893

2
0.7972
1.690

3
0.7118
2.402

4
0.6355
3.037

5
0.5674
3.605

You are required to:

a.

Calculate the initial outlay of the new equipment.

(2 marks)

b.
c.

Determine the net present value of equipment VEE and advice Autumn High Tech
Berhad on the purchase of this equipment.
(13 marks)
Assuming Autumn High Tech Berhad is considering to acquire an alternative
equipment known as equipment TEE. Equipment TEE has a net present value of
RM380,000 with an estimated useful life of 3 years. Would your advice be different
from your answer in (b)?
(5 marks)
(Total: 20 marks)

QUESTION 4
A. Riang Ria Berhad operates an amusement center in Perlis. It is considering a capital
investment in a new machine. The machine would cost RM80,000 with an installation
and training cost of RM1,000 and RM1,500 respectively. An additional employee will
be hired and paid with a monthly wage of RM450. The new machine has an estimated
useful life of 5 years. It will be sold for RM30,000 at the end of its useful life. The
project will be expected to increase the net annual cash inflows by RM25,000. The
annual cost of capital is 8%. The initial and annual allowance is 20% and 15%
respectively. The company tax rate is 25%, and payable in the year it is incurred. An
additional capital of RM10,000 is required in year 5.
Present Value Factors Table
Year

Cumulative Present Value Factors

Table

Discount Factor
(8%)
0.926
0.857
0.794
0.735
0.681
0.630

1
2
3
4
5
6

Year
1
2
3
4
5
6

Discount Factor
(8%)
0.926
1.783
2.577
3.312
3.993
4.623

Required:
a) Determine the net present value of this project and advice Riang Ria Berhad
whether to accept or reject the project.
(10 marks)
b) Explain each of the following:
i)
ii)
iii)
iv)

Soft capital rationing

Hard capital rationing
Balancing charge
Balancing allowance
(4 marks)

B. Petunia Sdn. Bhd. is considering two new projects which requires an equipment
investment of RM33,000 each. Each project will last for 3 years and produces the
following cash inflows:
Year
1
2
3

Cempaka Project
(RM)
11,250
13,500
22,500

Bunga Raya Project

(RM)
19,600
18,800
10,250

The company is using the straight-line method to depreciate the equipment which has
no scrap value at the end of its useful life. The company will not accept any project
with a payback period over 2 years. The cost of capital of the company is 8%.
You are required to compute each projects payback period by using the discounted
cash flow method. Which project should you choose?
(Round your answer to two decimal places)
(6 marks)
(Total: 20 marks)