A food processing shop in Accra (Biem) is considering adding a new line and you are hired to conduct the capital budget analysis. Biem needs to increase to production capacity to meet increase demand for an existing product, Quado\' , which is used in food processing. a new machine, with a useful life of four years and a maximum output of 60,000 kg of Quado per year, could be ¢30,000. forecast demand and production of Quado over the next four years is as follows;

       Year                        1                             2                       3                    4

Demand (kg)        1.4 million           1.5 million         1.6 million        1.7 million

Existing product capacity for Quado is limited to one million kilograms per year. the current selling price of Quado is ¢8.00 per kilogram and the variable cost of material is ¢5.00 per kilogram. other variable cost of production are ¢1.90 per kilogram. Fixed cost of production associated with the new machine would be ¢240,000 in the first year of production, increasing by ¢20,000 per year in each subsequent year of operation.

Biem pays tax one year in arrears at an annual rate of 30% and can claim capital allowance (tax-allowance depreciation) on a 25% reducing balance basis. a balancing allowance is claimed in the final year of operation. Biem uses its after tax rate weighted average cost of capital when appraising investment projects. it has a cost of equity of 11% and before tax cost of debt of 8.6%. the long term finance of the company, on a market - value basis, consist of 80% equity and 20% debt.

1. calculate the net present value of buying the new machine and advice on the acceptability of the proposed purchase.