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An automobile spare part manufacturer has set up a project for developing a new machine for one of its production lines. The engineering department has provided a project proposal that estimates the following investment requirements: i) An initial investment of RM 300,000 to be paid for purchasing the new machine. ii) An additional cost is needed to install the machines and integrate it into the overall production system and it is estimated to take one (1) year for completion. There are three cost categories involved: Engineering labor cost, estimated to be 1200 hours at a cost of RM 100/hour. None-engineering labor cost, estimated to be 3000 hours at a cost of RM 50/hour. Assorted material cost, estimated to be RM 100,000. iv) The machine has to be overhauled every 2 year, and it costs RM 20,000 beginning in the third year of the project. They will not overhaul the machine in the last year of its life. V) The production will be started in the second year, and it will be up-to-speed by the end of that year. vi) Projected manufacturing cost savings and added profits are estimated to be RM 100,000 in the first year of operation and are expected to peak at RM 250,000 in the third year of operation, and then to follow the gradually declining pattern shown in Table 1. vii) Project life is expected to be 6 years. viii) It is estimated that the machinery will have a salvage value of RM 50,000 at the end of the operation. Table 1. Cost saving and added profits of project Year of production Profit (RM) 1 2 3 4 5 100,000 230,000 250,000 243,000 227,000 a) If the company has a 10 percent hurdle rate for capital investment, estimate the Net Present Value (NPV) of the project. (10 marks) b) What would happen to the NPV of the above project, if the inflation rate was expected to be 1.5% per year. Comment on the project whether to be accepted or rejected. (10 marks)

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