QUESTION 4

Evaluate the cost-benefit analysis used to justify the purchase of the new machine. (5marks)

Year (RM000) Cost of machines Maintenance costs Reduced staff costs

Reduced wastage Energy savings

1
(18)

2
(18)

3
(18)

4
(18)

5
(18) (90)

(5) 15
2 2 (4)

(5) 15
4 2 (2)

(5) 15
6 2 0

(5) 15
8 2 2

(5) 15
10 2 4

0 0
0 0 0

Cost benefit analysis

If the company buy the machine we can save RM2000 Reduced staff cost RM15,000 every year Reduced wastage RM2,000 for the first year and reduction increase RM2,000 every year. This will make NMS efficient. Spread the cost of machine of RM90,000 evenly over 5 years, and got RM18,000 for this. Maintenance cost over 5 years is only RM5,000 For the first and second year, the cost will outweigh benefit of (RM4,000) and (RM2,000) For the fourth and fifth year, the benefit will outweigh cost of RM2,000 and RM4,000

Year Initial Outlay

(RM000)

Cash Inflow Cash (RM000) Outflow (RM000)

Total Cash Inflow/ (Outflow) (a) (RM000)

PVIF @ 9 % (b)

Present Value (a x b) (RM000)

0 1 2 3 4 5

-90 15+2+2 15+4+2 15+6+2 15+8+2 15+10+2 -5 -5 -5 -5 -5

-90 14 16 18 20 22

1.0000 0.9174 0.8417 0.7722 0.7084 0.6493

-90 12.8436 13.4672 13.8996 14.168 14.2846

NPV

-21.337

Net present value

Net present value is better than Cost benefit analysis because it consider the time value of money. RM1 today is better than RM1 tomorrow. First, determine its initial outlay, cash inflow, cash outflow and adding up all these in order to know the total inflow or total outflow. Discount the total cash flow with cost of capital of 9%. Our company face a lot of risks like inflation, therefore we need to use the concept time value of money to consider this new machine. Initial outlay for the machine incur in year 0. Then we punch in cash inflows and outflows value from the first year to fifth year. Next add all initial outlay, cash inflow and cash outflow to get total outflow. Then, discount total cash flow with present value interest factor of 9% and arrive to present value. Lastly add all present value column to get net present value. After computing all the data, we arrived to negative NPV which means that buying the machine will not profit our company.