The following analysis is derived from the research and development (R&D) section of ZAR Sdn. Bhd.
ZAR Sd. Bhd. is considering the purchase of a packaging machine. The purchase price of the machine is RM80,000, plus an additional RM1,500 to ship and RM25,000 to install. The new machine will have a 5-year useful life and will be depreciated using the 3-year MACRS class (Depreciation in Year 1 – 33%; Year 2 – 45%; Year 3 – 15%; and, Year 4 - 7% on costs). The machine is expected to generate new sales of RM40,000 per year and is expected to save RM15,000 per year on labour expenses over the next 5 years. However, the production costs will also go up by RM3,000 every year. Upon buying the machine, it requires inventories to increase by RM20,000 and accounts payable increase by RM10,000. The change in Net Operating Working Capital is expected to be fully recovered at year 5. The machine is expected to have a disposal value of RM30,000. ZAR Sdn. Bhd. uses a 12% discount rate for capital budgeting purposes and the firm's income tax rate is 40%.
Required:
a. Should ZAR proceed with the new project?
b. Using the Payback Period Method and Discounted Payback Period Method, calculate the number of years needed to recover the initial cash outlay.
c. Explain relevant and irrelevant cash flow by giving 2 examples respectively.