Question
b) Wangwana ltd has acquired a machinery at a cost of ksh 25,000,000. The machinery is expected to generate year-end cash inflows with zero salvage
b) Wangwana ltd has acquired a machinery at a cost of ksh 25,000,000. The machinery is expected to generate year-end cash inflows with zero salvage value at the end of its five-year life as follows; Year Cash flow (Ksh) 0 (25,000,000) 1 9,000,000 2 8,000,000 3 7,000,000 4 ? 5 5,000,000 The company has a tradition of investing in machinery only if it assures a profitability index (PI) of 1.01892 given the cost of capital of 13%. Required: i) Determine the cash inflow in year 4 that would secure the companys interest. (5 Marks) ii) If the company uses a cost of capital of 15%, then the profitability index (PI) changes to 0.97604. Using the PI details above and the two costs of capital provided, calculate the internal rate of return (IRR) for the machinery. (5 Marks) (do not use the cash flows)
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