Co plans to buy a new machine. The cost of the machine, payable immediately, is Kshs80,000,000 and the machine has an expected life of five years. Additional investment in working capital of Kshs9,000,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced. Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for Kshs1,600 per unit and will incur variable costs of Kshs1,100 per unit. Incremental fixed costs arising from the operation of the machine will be Kshs16,000,000 per year. Kiziri Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Capital allowances and inflation should be ignored. Required

: a) Explain how could sensitivity analysis can be used to incorporate the aspect of uncertainity in capital budgeting using an example of your choice. . (4 mark)

b) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a change in discount rate, and comment on your findings. (6 marks)