Question

The Go-Shop Company wishes to introduce a new line of pressure cooker (PC) to the audience. The followings are the detailed of the new product:

Items	Explanation
Retail price	RM759.00 per piece
Fixed cost	RM500,000 per year
Variable cost	25% of the retail price
Working Capital Requirement	Cash in hand: 1% of sales revenues
	Inventory: 1.5% of sales revenues
	Account receivables: 2% of sales revenues
	Account Payables: 3% of variable costs

The project cost is expected to be RM1.2 million. The projected sales of the PC 2,000 units in the first year and expected to increase by 20% year on year until year 4, and then decline by 30% in the final year.

The project also requires the company to upgrade the showroom fixtures and fittings which will costs RM120,000, to be depreciated based on MACRS 5-year convention, and in Year 5, RM25,000 can be salvaged. The tax rate is 28% and cost of capital is 5.28%.

1. The book value of the fixtures and fittings at Year 5 is RM_________. (2 decimals)

2. The net proceed after tax of the fixtures and fittings at Year 5 is RM________. (2 decimals)

3 Earning Before Interest and Tax in Year 1 is RM__________. (2 decimals)

4 The Net Profit After Tax in Year 2 is RM____________. (2 decimals)

5  Sales Revenues in Year 3 is RM__________. (2 decimals)

6 . Variable Cost in Year 4 is RM_________. (2 decimals)

7 . Net Profit After Tax in Year 5 is RM__________. (2 decimals)

8 . Working Capital Requirement in Year 1 is RM___________. (2 decimals)

9 .Working Capital Requirement in Year 3 is RM___________. (2 decimals)

10 . Working Capital Requirement in Year 5 is RM___________. (2 decimals)

11. The initial outlay of the project is RM__________. (2 decimals)

12 . The cash flow/ free cash flow in Year 1 is RM____________. (2 decimals)

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The cash flow/ free cash flow in Year 3 is RM____________. (2 decimals)

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The cash flow/ free cash flow in Year 4 is RM____________. (2 decimals)

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16

1 point

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The cash flow/ free cash flow in Year 5 is RM____________. (2 decimals)

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17

1 point

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Total Present Value of the cash flow/ free cash flow is RM____________. (2 decimals)

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The Net Present Value (NPV) of the project is RM__________. (2 decimals)

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1 point

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The Internal Rate of Return (IRR) of the project is __________%. (2 decimals)

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1 point

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Total Future Value of the cash flow/ free cash flow invested at the same rate is RM____________. (2 decimals)

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Answer 1

1. 5-year MACRS depreciation rate are as below:

Year 1 - 20%, Year 2 - 32%, Year 3 - 19.20%, Year 4 - 11.52%, Year 5 - 11.52%, Year 6 - 5.76%

Project will end in year-5 and fixtures and fittings will be sold. so, Year 6 depreciation will not applied. hence, book value of fixtures and fittings at year will be 5.76% of fixtures and fittings.

book value of the fixtures and fittings at Year 5 = cost of fixtures and fittings*unapplied depreciation of Year 6 = 120,000*5.76% = 6,912.00

2. net proceed after tax of the fixtures and fittings =[sale value - (sale value - book value)*tax rate]

net proceed after tax of the fixtures and fittings = [25,000 - (25,000 - 6,912)*28%] = (25,000 - 18,088*25%) = 25,000 - 4,522 = 20,478.00

3. Earning Before Interest and Tax in Year 1 = (sale value - variable cost - fixed cost - depreciation)

Earning Before Interest and Tax in Year 1 = (2,000*759 - 2,000*759*25% - 500,000 - 120,000*20%) = 1,518,000 - 379,500 - 500,000 - 24,000 = 614,500.00

4. Net Profit After Tax in Year 2 = (sale value - variable cost - fixed cost - depreciation)*(1-tax rate)

Net Profit After Tax in Year 2 = (2,000*759 - 2,000*759*25% - 500,000 - 120,000*32%)*(1-0.28) = (1,518,000 - 379,500 - 500,000 - 38,400)*0.72 = 600,100*0.72 = 432,072