CASE Study FIN320 Assignment PDF

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MINI CASE STUDYBivient Company Corporation (BCC) is a medium electronics manufacturer located in KKIP, Sepanggar Kota Kinabalu Sabah. The company was founded 30 years ago with the original operation was repairing video player and other household appliances.Over the years, the company expanded into m...

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MINI CASE STUDY

Bivient Company Corporation (BCC) is a medium electronics manufacturer located in KKIP, Sepanggar Kota Kinabalu Sabah. The company was founded 30 years ago with the original operation was repairing video player and other household appliances.

Over the years, the company expanded into manufacturing and is now reputable manufacturer of various electronics items. Competition from other company makes this company needs to maintain the quality of their production. Because of that, they need to ensure the machine that they used in their operation must be sophisticated and not out-dated.

Currently, this company is considering replacing an existing machine used in production that was purchased 5 years ago for RM125, 000 with a new computer system that could improve the company’s operations. The old machine is being depreciated under straight line method over its useful life of 10 years with no salvage value. Its current market value is RM5, 000.

Chief Financial Officer for this company, Mr Abraham Teo has reviewing two (2) options: Machine TKC imported from China and Machine RMR imported from Japan. Below is the information provided for the new machine.

Cost of Asset Freight and transportation cost Installation cost Renovation cost (before installation of the machine) Training cost (to operate the machine) Depreciation method Salvage value Useful life

Machine TKC RM200,000 RM10,000

Machine RMR RM150,000 RM12,000

RM5,000 RM8,000

RM3,000 RM5,000

NA

RM5,000

Straight line RM10,000 5 years

Straight line RM8,000 5 years

The replacement of old machine will result the following changes: 1

Annual sales Annual cost of defects Annual operating cost Quarterly maintenance cost Initial investment in Net working capital

Old machine RM500,000 RM80,000 RM50,000 RM10,000

Machine TKC Increase by 20% Decrease by 5% Increase by 2.5% Decrease by 1.5%

Machine RMR Increase by 35% Decrease by 3% Increase by 4% Increase by 2%

NA

RM30,000

RM20,000

Assume that the company’s cost of capital and tax rate is 10% and 40% respectively. From the replacement plan, calculate: i) Net Present Value ii) Profitability index iii) Based on your answers in (i) through (ii), prepare a report to be present to the BOD of the company which machine will the company need to buy? Discuss the reason why?

2...