8A company is contemplating investing in a machine to manufacture product X. The details are as follows;

Investment required (Period 0) P1 million.

Life span of the project - 3 Years

At the end of 3 years, the asset will be sold for P500,000 ( Disposal value)

• Year 1 cash flow after tax will equal P300,000
• Year 2 cash flow after tax will equal P250,000
• Year 3 cash flow after tax will equal P200,000

The company is currently financed equally (50:50) by debt and Equity.

• Ke (Cost of Equity) 20%
• Kd (Cost of debt) 10% after Tax

REQUIRED:

a) Advise the Company management on the correct decision to make using NPV calculation to prove your point.