a. Mapata Ltd is a company involved in the processing of wealth and the management is considering whether to replace an existing cooler. The old coller is fully depreciated and has no salvage value. If not replaced, the company will continue to incur ksh 1.8 million as normal operating expenses and an additional cost of sh 500000 In repair cost per annum over the next 15 years.

The new cooler cost sh 3150 000 its annual operating expenses and repair costs are estimated at sh 1.3 million and sh 350000 respectively over its expected economic life is 15 years.

Its expected to be worthless after the expiry of the period. The cost of capital is 10% and the company depreciates its assets using the straight line method. Assume a tax of 30%.

Required

i. Compute the increamental net annual cash flows if the old cooler is replaced.

(8 marks)

ii. Using NPV method, advice the management on whether or not to replace the old cooler.

(4 marks)

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