GAP Textile Şdn Bhd. is a retail chain specialising in casual clothing. Due to increasing demand, the management of GAP Textile Şdn. Bhd. is considering to purchase a new equipment to increase the production and revenues. Its choice is between Equipment X and Equipment Y. Both equipment have a useful life of 5 years. The initial cost (cash outlay) for Equipment X is RM180,000 and for Equipment Y is RM250,000 and their respective salvage values at the end of year 5 are given as follows: Equipment X (RM) (180,000) 12,000 Year Equipment Y (RM) (250,000) 20,000 5 The forecasted net operating cashflows generated of the two equipment are given as follows: Equipment X (RM) 40,000 50,000 90,000 Year Equipment Y (RM) 70,000 70,000 70,000 1 3 4 70,000 70,000 70,000 70,000

GAP Textile Şdn Bhd. is a retail chain specialising in casual clothing. Due to increasing demand, the management of GAP Textile Şdn. Bhd. is considering to purchase a new equipment to increase the production and revenues. Its choice is between Equipment X and Equipment Y. Both equipment have a useful life of 5 years. The initial cost (cash outlay) for Equipment X is RM180,000 and for Equipment Y is RM250,000 and their respective salvage values at the end of year 5 are given as follows: Equipment X (RM) (180,000) 12,000 Year Equipment Y (RM) (250,000) 20,000 5 The forecasted net operating cashflows generated of the two equipment are given as follows: Equipment X (RM) 40,000 50,000 90,000 Year Equipment Y (RM) 70,000 70,000 70,000 1 3 4 70,000 70,000 70,000 70,000

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 12P

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Required:

Calculate the Net Present Value (NPV) of Equipment X and Equipment Y given that the cost of capital is 12%. Assuming that they are mutually exclusive, explain with reason which equipment should the management select.

GAP Textile Sdn Bhd. is a retail chain specialising in casual clothing. Due to increasing demand, the
management of GAP Textile Şdn. Bhd. is considering to purchase a new equipment to increase the
production and revenues. Its choice is between Equipment X and Equipment Y. Both equipment have
a useful life of 5 years.
The initial cost (cash outlay) for Equipment X is RM180,000 and for Equipment Y is RM250,000 and
their respective salvage values at the end of year 5 are given as follows:
Equipment X (RM)
(180,000)
12,000
Equipment Y (RM)
(250,000)
Year
20,000
The forecasted net operating cashflows generated of the two equipment are given as follows:
Equipment X (RM)
40,000
Year
Equipment Y (RM)
1
70,000
2
50,000
70,000
3
70,000
90,000
70,000
4
70,000
5
70,000
70,000

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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