A) An individual expects to deposit K.sh. 200,000 in a Bank account at the end of each year over a period of 5 years. He expects the deposit to earn an interest of 12% p.a.

Required: Determine the total future value of the deposits.(2 Marks)

(B) A Company is considering investing in the purchase of a Machine which is expected to be used in manufacturing. The Company expects to generate the following cash flows at the end of each year of the Machines expected economic life of 5 years.

Year (end)

1

2

3

4

5

Net Cash Flows (k.sh.)

50,000

40,000

30,000

20,000

20,000

The Company requires a minimum rate of return of 18% p.a.

Required:

Compute the total present value of all expected future cash flows.(5 Marks)

(c) The initial cost of a machine was K.sh. 2,700,000. The machine needed to be fixed to the fabric of the companies premises in Kisumu City and as a result extra expenses were incurred as follows:

Freight Charges - Sh. 225,000, Installation costs to the premises - Sh. 375,000 and the import duty was Sh. 900,000. The expected economic life of the machine was estimated to be 6 years. The expected earnings before tax and depreciation (EBDT) was as follows:

Year

1

2

3

4

5

6

K.sh.

K.sh.

K.sh.

K.sh.

K.sh.

K.sh.

EBDT

1,760,000

1,360,000

1,050,000

900,000

840,000

750,000

Required:

Calculated the payback period (PBP).(3 Marks)