FM Cois a Zambian Small and Medium Enterprise $($SME$)$ that is considering undertaking a

number capital projects over the next $15$ years toimprove thegeneral performance of the

company. The company directors are concernwith maintenance of anappropriate liquidity

position for smooth operations. One of the investments under consideration is a $10-$year Kwasha

Mukwenu $($KM$)$ project that requires an initial cost of K$60,000,000.$ This project will have a

zero$-$scrapvalue at the end of its life. The company uses a straight$-$line policy of depreciation.

Other details relating to the KM project are given below.

Year$1234$ to $67$ to $10$

K$000$K$000$K$000$K$000$K$000$

Profit$/($loss$)(12,000)3,00010,00015,000$ per year$20,000$ per year

FM Co has a target accounting rate of return $($ARR$)$ of $40\%$ while cost of capital used to appraise

capital projects is $15\%.$The firm$$sacceptable basic payback period is $5$ years $6$ months.

REQUIRED:

a$)$For the KM project, calculate the following:

i$.$Accounting Rate of Return $($ARR$)$

ii$.$Net Present Value $($NPV$)$

iii.Internal Rate of Return $($IRR$)$

iv$.$Basic Payback Period $($BPP$)$

b$)$Comment on EACH of the results in $($a$)$ above.

c$)$Briefly discuss the importance of using the correct discount rate $($cost of capital$)$ in

project appraisal.

d$)$Briefly discuss the ANY TWO financing challenges faced by small and medium

enterprises$($SMEs$)$in Zambia.

END OF QUESTION PAPER