Answer Happy

Purple Berhad's production manager is putting together a capital appraisal to replace a machinery in the Batu Maung factory and has sought your advice. Current machinery Purchased 4 years ago for RM600,000. Sales proceeds of RM50,000 achievable 5 years from now. If retained, the machinery will require major repairs at the end of the first year amounting to RM50,000, and a further repair of RM20,000 at the end of the third year. Annual cash flows are estimated to be RM30,000. If sold now, it would be for RM70,000. Proposed replacement Cost RM900,000 fully installed. Effective life would be for 5 years. Annual maintenance costs would be RM30,000 per year. Cash flows expected to increase to RM60,000 per year. Additional information Ignore tax effects. Cost of capital is at 10% per annum. a) b) Using only Net Present Value as your basis of decision, recommend to the production manager to retain the current machinery, or to replace it. (17 marks) Give TWO criticisms each for the Accounting Rate of Return and Payback Period capital budgeting techniques. (8 marks)