TUTORIAL: Capital budgeting: Cash flow principles
QUESTION 1
Use the following information to answer the next 4 questions.
A firm is trying to determine whether to purchase a new machine. The proposed
machine has a purchase price of RM200,000, installation costs of RM50,000 and
shipping cost of RM20,000. It also require an additional cost of RM30,000 training. The
machine will be depreciated over its six year life using the simplified straight-line
method. The new machine is expected to increase sales by RM200,000 and cost of
maintenance by RM50,000 annually over the life of the asset. Due to increase sales, the
firm expects an increase in working capital during the machine’s life of RM40,000 and
the firm expects to be able to sell the machine for RM10,000 at the end of its life.
Finally, to purchase the new machine, the firm would have to borrow RM30,000 at 7%
interest from its local bank, resulting in additional interest payments of RM3,200 per
year. The firm’s marginal tax rate is 40% and its required rate of return is 10%.
a) Calculate initial outlay
RM340,000
b) Calculate operating cash in1ows.
RM108,000
c) Calculate terminal cash 1ow (including operating cash1ow)
RM46,000 + RM108,000
