Topics: Net present value, Internal rate of return, Rate of return Pages: 5 (1133 words) Published: November 22, 2012


Course/Group: DAC4|
No.| Student Name| Student ID Number|
1.| YEOH JUEN LIN| 11ABD00859|
2.| WONG ZHI XIN | 11ABD05414|
3.| GARY TAN YOU HAO | 11ABD04240|
4.| CHIN GAI CHUN| 11ABD01649|
Lecturer: Ms LEE YEAN LEONG |
Date of Submission: 2012 |

1(a) Ways to improve on deficit cash flow:
i. Negotiate with the supplier for larger credit terms
ii. Offer cash discount to customers for early payments
iii. Firm can carry out cost cutting exercise to reduce overhead expenses

Question 2 b)
* internal rate of return (IRR) =A + [a/(a-b) x (B-A)] where * A = is the discount rate which provides the positive NPV * A =is the amount of the positive NPV
* B =is the discount rate which provides the negative NPV * b =is the amount of the negative NPV
internal rate of return (IRR) (machine 1) = 12% + 66934 /(66934 + 7716) x (20- 12) =19.173% internal rate of return (IRR) (machine 2) = 12% + 43400 / (43400+ 38517) x (20-12) =16.238% Machine M1 should be invested because it has higher NPV than machine M2

2(c) Difference between IRR and NPV
* While NPV is expressed in terms of a value in units of a currency, IRR is a rate that is expressed in percentage which tells how much a company can expect to get in percentage terms from a project down the years. * NPV takes into account additional wealth while IRR does not calculate additional wealth * If cash flows are changing, IRR method cannot be used while NPV can be used and hence it is preferred in such cases * While IRR gives same predictions, NPV method generates different results in cases where different discount rates are applicable. * NPV is calculated in terms of currency while IRR is expressed in terms of the percentage return a firm expects the capital project to return; viewed on 6th November 2012 viewed on 6th November 2012

(d) Based on our answers calculated in part (a), Machine 1 should be invested as it gives a larger profit than Machine 2 which is RM 66934.

3a) i) At reorder quality= 3000 units
Total annual holding costs:
Q/2 x Ch
3000/2 x 0.2x30= 9000
Total annual ordering costs
D/Q x Co
Purchase cost
Rm30x(500x12) =180000
Total annual inventory cost : RM189400

ii) EOQ =(2xCoxD)Ch
= 24000009000
=266.67 units
=267 units(rounded off)
The EOQ of 267 units means that this is the economical quantity purchase since it minimizes the cost of ordering and holding inventory. iii) At EOQ : 266.67 units
Annual holding cost 266.67units/2 x 0.2 x 30 = RM800.01
Ordering cost 6000/267.66 x 200 = RM4483.30
Purchase cost RM30 x (500x12) = RM 180000
Total annual inventory cost RM 185283.31

iv) At reorder quantity of 3000 packets, the total annual inventory cost = RM 189400. At EOQ, total annual inventory cost = RM 185284.14. If Wita Sdn.Bhd orders at economic order quantity, the cost savings= RM 4104.60

b) With a discount of 5% and an order quantity of 3000 units costs are as follows: Purchases (180000x95%) 171000 Holding costs (3000/2x0.2x30x95%) 8550 Ordering costs (6000/3000)x RM200 400 Total annual cost 179950 It is advised that Wita Sdn.Bhd should accept the discount given as it is cheaper.

3 (c) The 3 main...
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