Question
). A company is considering investing in a project that will involve the purchase of machinery costing sh. 8 million with a useful life of
). A company is considering investing in a project that will involve the purchase of machinery costing sh. 8 million with a useful life of 5 years and zero salvage value. Installation of machinery would result into annual savings of material and labor costs of sh. 2 million and sh. 1.5 million respectively for five years. A company forecasted that the material and labor cost savings will be affected by inflation at the rate of 13% and 8% per annum respectively. A company estimates the inflation adjusted discount rate to be 14%. Required: Compute the expected NPV of the project using: (i). Real cash flows (6 MARKS) (ii). What is the significance of the relationship between money rate, real rate, and inflation rate in capital budgeting decisions? (4 MARKS)
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