A company is considering an investment proposal to install new milling controls. The project will cost Kes50,000. The facility has a life expectancy...
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A company is considering an investment proposal to install new milling controls. The project will cost Kes50,000.

The facility has a life expectancy of five years and no salvage value. The company's tax rate is 40%. The estimated cash flows from the proposed investment proposal are as follows:

Year                           CF

1                                 10,000

2                                 11,000

3                                 14,000

4                                 15,000

5                                 25,000

Compute:

a.      Accounting Rate of Return and advise management if

the required rate of return is 6 %                                                             (4Mks)

b.     Traditional Payback period and advise management

on the feasibility of the project                                                                (4Mks)

c.      Discounted payback period at 6% discounting factor                             (4 Mks)

d.     Net present value at 6% discounting factor and advise

management on the project's feasibility                                                  (4 Mks)

e.      Net present value at 15% discounting factor and advise

Management on the project's feasibility                                                  ( 4 Mks)

f.      Internal rate of return and explain its significance to the firm                (6 mks)

g.     Profitability Index at 10% discounting factor                                         ( 4 Mks)

Top Answer

a. The annual rate of return is 10% which is greater than the required rate of return (i.e. 6%). Therefore, management should... View the full answer

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