Chu-stadia Limited is a Zambian company with the majority shareholders from the Peoples Republic of Chongololo. The company won a tender to develop two (2) projects on behalf of its client, Fisuma Limited.

The projects are being considered to be undertaken in two provinces, namely; Western Province, for Project West, and Eastern Province, for Project East.

During the recent board meeting held at the end of first quarter in March, 2011, it was resolved that only one project should be undertaken due to insufficient funds.

The following data is available for the two projects being considered:

1. Project West will be used to manufacture boat nuts while Project East will manufacture bicycle tubes.

2. Production and sales units are expected to be:-

                  Boat nuts      Bicycle tubes

Year 1            9,500                7,500

         2          10,000                7,500

         3          10,000              11,500

         4            9,500              12,500

3. The two projects (West and East) will cost K155,000,000 and K175,000,000 respectively and will last for four (4) years after which each project will have a residual value of K15,000,000 and K25,000,000 respectively.

4. Both products will sell for K10,000.00 each.

5. The Boat nuts will have variable costs of K5,000.00 per Boat nut and the Bicycle tubes will have a variable cost of K4,500 per tube.

6. Fixed costs (inclusive of straight line depreciation of the projects) will be K45,000,000.00 per annum for Boat nuts and K60,000,000.00 per annum for Bicycle tubes.

7. Assume that the selling price, fixed costs and variable unit costs will remain constant over the four year period.

8. The cost of funds for Fisuma limited is 10% per annum.

In your capacity as management accountant of FIsuma limited, you are required to:

Calculate the annual cash flow arising from the manufacturing of both Boat nuts and Bicycle tubes, assuming that each project will be disposed off for its residual value at the end of four years. 

Evaluate each project, using the following methods:

Payback period (2 marks)

Net present value (4 marks)

Advise management as to which project should be undertaken by Chu Stadia Limited giving two reasons. (3 marks)