Mambo Jumbo Food Inc. is considering switching its manually operated machine with a new automated machine. Although the

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Mambo Jumbo Food Inc. is considering
switching its manually operated machine with a new automated
machine. Although the existing unit has 5 more years of service
life, its operating costs are fairly high compared to its revenue.
The new automated machine costs RM2.5 million. An additional
RM100,000 is needed for transportation and installation. The new
machine is expected to generate incremental revenues of RM2 million
with an incremental overhead cost of RM700,000 per year. It will be
depreciated over 5 years to a salvage value of RM200,000.
(a) Define the three basic cash flows
involved in a typical capital budget. Is the above investment a
replacement or an expansionary project? Justify.
(b) If the firm’s cost of capital is
12%, calculate the following:
(i) Payback
period
(ii) Net Present value
(iii) Internal Rate of Return (Try one
discount factor higher than 40%)
(c) Advice the management on whether it should go ahead with
this investment or not. Justify.
(d) Determine the Modified Internal Rate of Return.
Mambo Jumbo Food Inc. is considering
switching its manually operated machine with a new automated
machine. Although the existing unit has 5 more years of service
life, its operating costs are fairly high compared to its revenue.
The new automated machine costs RM2.5 million. An additional
RM100,000 is needed for transportation and installation. The new
machine is expected to generate incremental revenues of RM2 million
with an incremental overhead cost of RM700,000 per year. It will be
depreciated over 5 years to a salvage value of RM200,000.
(a) Define the three basic cash flows
involved in a typical capital budget. Is the above investment a
replacement or an expansionary project? Justify.
(b) If the firm’s cost of capital is
12%, calculate the following:
(i) Payback
period
(ii) Net Present value
(iii) Internal Rate of Return (Try one
discount factor higher than 40%)
(c) Advice the management on whether it should go ahead with
this investment or not. Justify.
(d) Determine the Modified Internal Rate of Return.
Mambo Jumbo Food Inc. is considering
switching its manually operated machine with a new automated
machine. Although the existing unit has 5 more years of service
life, its operating costs are fairly high compared to its revenue.
The new automated machine costs RM2.5 million. An additional
RM100,000 is needed for transportation and installation. The new
machine is expected to generate incremental revenues of RM2 million
with an incremental overhead cost of RM700,000 per year. It will be
depreciated over 5 years to a salvage value of RM200,000.
(a) Define the three basic cash flows
involved in a typical capital budget. Is the above investment a
replacement or an expansionary project? Justify.
(b) If the firm’s cost of capital is
12%, calculate the following:
(i) Payback
period
(ii) Net Present value
(iii) Internal Rate of Return (Try one
discount factor higher than 40%)
(c) Advice the management on whether it should go ahead with
this investment or not. Justify.
(d) Determine the Modified Internal Rate of Return.
Mambo Jumbo Food Inc. is considering
switching its manually operated machine with a new automated
machine. Although the existing unit has 5 more years of service
life, its operating costs are fairly high compared to its revenue.
The new automated machine costs RM2.5 million. An additional
RM100,000 is needed for transportation and installation. The new
machine is expected to generate incremental revenues of RM2 million
with an incremental overhead cost of RM700,000 per year. It will be
depreciated over 5 years to a salvage value of RM200,000.
(a) Define the three basic cash flows
involved in a typical capital budget. Is the above investment a
replacement or an expansionary project? Justify.
(b) If the firm’s cost of capital is
12%, calculate the following:
(i) Payback
period
(ii) Net Present value
(iii) Internal Rate of Return (Try one
discount factor higher than 40%)
(c) Advice the management on whether it should go ahead with
this investment or not. Justify.
(d) Determine the Modified Internal Rate of Return.