Business X wants to acquire a machinery whose details are as follows:

Cost Sh. 5,000,000

Cash flows

Year 1 Sh. 1,800,000

Year 2 Sh. 1,500,000

Year 3 Sh. 1,300,000

Year 4 Sh. 1,000,000

Year 5 Sh. 800,000

Additional information

1. The cost of capital in this business is 11%

2. The business pays tax at the rate of 30%

3. The business depreciates all its assets on reducing balance method at the rate of 8%

4. The scrap value of the machinery at the end of year 5 will be sh.300,000.

5. The operational costs for the machinery are estimated to be sh. 270,000 per annum

6. Salary of the project manager will be sh. 25000 per month.

7. The machinery will require sh.40,000 as transportation costs to the site and sh. 150,000 for installation.

Required

Use the net present value (NPV) and accounting rate of return to evaluate the project and advise the management accordingly (25 marks)