Answer to Question #305631 in Financial Math for Zack

Question

A company is considering an investment proposal to install new milling controls. The project will cost Kshs 50,000,000. 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 Kshs 000

1                                       13,000

2                                       14,000

3                                       18,000

4                                       23,000

5                                       25,000

Compute:

a.     Accounting Rate of Return                                         (2Marks)

b.     Discounted payback period at 6% discounting factor                        (4 Marks)

c.     Net present value at 15% discounting factor and advise management on the project’s feasibility                                                                ( 4 Marks)

Answer 1

The various computations are shown in the table below: