QUESTION ONE (20 MARKS)

Opera ltd has a project with an initial cost of ksh 45 million and its considering whether to invest in it in the coming year. The company has decided to establish the projects internal rate of return as follows;

Year	Cash flows (Ksh)
1	19,000,000
2	16,000,000
3	14,000,000
4	10,000,000
5	8,000,000

Opera ltd is considering a mix of financing sources for this business as follows:

Source	Amount (ksh)	Before-tax cost
Equity capital	25,000,000	18%
Preference capital	10,000,000	11%
Debt capital	10,000,000	11.4%

Required:

1. Demonstrate that the internal rate of return (IRR) for this project is 13.87%

(10 Marks)

2. Advise the management with adequate explanation as to the acceptability of this project.(10 Marks)