An Oil mining company code named Maroc Group of Companies (MGC) LTD is considering an investment in an item of equipment coding GHC80,000.00. The equipment would attract a 25% annual written down allowance. The operating cash flows are expected to be as follows:

Year GHC

1. 30,000.00
2. 40,000.00
3. 20,000.00

The investment would also require additional working capital of GHC25,000.00 in the year of investment which will be recovered at the end of the project. The equipment is expected to have a useful life of three years after which it would be scrapped at a value of GHC50,000.00. The rate of tax on profits is 30%. The company is fully equity financed and risk-free rate on government security is given as 5%, market risk premium 6% and systematic risk 0.50.

Required

1. Estimate the cost of capital for MGC (2 marks)
2. Assess the viability of the investment using the Net Present Value (NPV) approach (5 marks)
3. Estimate the cost of capital for which the equipment becomes unprofitable (5 marks)

Estimate the Modified Internal rate of returns (