Kajulu Limited is considering the acquisition of a new machinery to be used in the production...

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Kajulu Limited is considering the acquisition of a new machinery to be used in the production of product Q. The machinery will cost Shs. 7,500,000 and with nil Salvage value at the end of its economic life of 5 years. After carrying out a research and analysis of the cash flows expected from machinery, the company's finance manager discovered that there were three uncertain variables whose anticipated value are given below: The demand for product Q is expected to 50,000 units per annum, with an upper limit of 52,500 units and a lower limit of 47,500 units The selling price per unit of product Q is expected to be Sh.250 with an upper limit of Sh.275 and a lower limit of Sh. 225 Fixed cost excluding depreciation) are expected to amount to Sh.2,000,000 per annum, with an upper limit of Sh.2,100,000 and a lower limit of Sh.1,900,000. Additional information: i. ii. The variable costs of product Q are expected to be 60% of the sales revenue of the product. The company applies a policy of straight line depreciation on its fixed assets. iii. The company's cost of capital is 15% Corporation tax is 30% iv. Assume all the cash flows occur at the end of each year. Required: Conduct sensitivity analysis of uncertainty using NPV method and Comment on your results. (10 marks) Kajulu Limited is considering the acquisition of a new machinery to be used in the production of product Q. The machinery will cost Shs. 7,500,000 and with nil Salvage value at the end of its economic life of 5 years. After carrying out a research and analysis of the cash flows expected from machinery, the company's finance manager discovered that there were three uncertain variables whose anticipated value are given below: The demand for product Q is expected to 50,000 units per annum, with an upper limit of 52,500 units and a lower limit of 47,500 units The selling price per unit of product Q is expected to be Sh.250 with an upper limit of Sh.275 and a lower limit of Sh. 225 Fixed cost excluding depreciation) are expected to amount to Sh.2,000,000 per annum, with an upper limit of Sh.2,100,000 and a lower limit of Sh.1,900,000. Additional information: i. ii. The variable costs of product Q are expected to be 60% of the sales revenue of the product. The company applies a policy of straight line depreciation on its fixed assets. iii. The company's cost of capital is 15% Corporation tax is 30% iv. Assume all the cash flows occur at the end of each year. Required: Conduct sensitivity analysis of uncertainty using NPV method and Comment on your results. (10 marks)

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