Question

Shella Bakery Sdn Bhd is also considering an investment on new updated machinery of RM500,000 expected to generate substantial cash inflows over the next five years. Unfortunately, the annual cash flows from the investment are uncertain, thus the following probability has been established:

 

At the end of its five-year life, the machinery is expected to be sold for RM50,000. The cost of capital is 8%. Determine whether the investment on machinery should be undertaken.

Answer 1

Annual cashflows = (80000*30%)+(100000*40%)+(150000*30%)

                                = 109000

Year1 to Year4 cashflows = 109000

 

Year5 cashflow = 109000+50000

                            = 159000

 

Use NPV function in EXCEL to find NPV. If NPV is positive, then project should be accepted or else rejected

= NPV(rate,Year1 to Year5 cashflows)-Year0 cashflow

= NPV(8%,Year1 to Year5 cashflows)-500000 = -30765.45

NPV = -$30765.45

 

NPV is negative, hence project should be rejected.

cost of capital	8.0%
	Cashflows
Year0	-500000
Year1	109000
Year2	109000
Year3	109000
Year4	109000
Year5	159000
NPV	-30765.45

NPV = -$30765.45