1. UBI Furniture Co. is planning to make a new table. The cost of the...
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1. UBI Furniture Co. is planning to make a new table. The cost of the new machine would be RM420,000, payable immediately. The sales demand will remain the same for the next four years which is 1,000 units per year. The selling price of tables is estimated to be RM290 per unit (current price terms) and the variable costs of production is RM90 per unit (current price terms). Beginning from year 1 of the production, both selling price and variable costs will increase according to the countrys inflation rate. Annual fixed production overheads for all the four years estimated to be RM55,000. It is expected that all units of table produced will be sold, keeping no inventory of finished goods. The initial investment in year 0 will be depreciated equally over four years. No terminal or scrap value is expected at the end of four years, when production is planned to end. Weighted average cost of capital is 10%,tax rate is 30% and country inflation rate is 3%.
i) Calculate NPV and IRR for UBI Company. ii) Discuss the strengths and weaknesses of both NPV and IRR methods
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