Mwetu Limited has approached you as a finance expert for advice on an equipment to be...

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Mwetu Limited has approached you as a finance expert for advice on an equipment to be purchased for use in a five year project. You establish that the investment will involve an initial capital outlay of Shs. 1.4 million and the expected cash flows are given below: Year Cash inflows Cash outflows Shs. 800,000 750,000 900,000 12345 2 1,200,000 1,100,000 Shs. 65,000 80,000 50,000 55,000 70,000 The equipment is to be depreciated on a straight line basis over the duration of the project with a nil residual value. The cost of capital and the tax rate are 12% and 30% respectively. Using the net present value (NPV), evaluate the investment giving a verdict whether it should be undertaken or not. (7 marks) Mwetu Limited has approached you as a finance expert for advice on an equipment to be purchased for use in a five year project. You establish that the investment will involve an initial capital outlay of Shs. 1.4 million and the expected cash flows are given below: Year Cash inflows Cash outflows Shs. 800,000 750,000 900,000 12345 2 1,200,000 1,100,000 Shs. 65,000 80,000 50,000 55,000 70,000 The equipment is to be depreciated on a straight line basis over the duration of the project with a nil residual value. The cost of capital and the tax rate are 12% and 30% respectively. Using the net present value (NPV), evaluate the investment giving a verdict whether it should be undertaken or not. (7 marks)

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