Global steel manufacturing Plc owns a machine that can manufacture a maximum of 3,500 units per hour. The initial cost of the machine was K95 million and the current profit margin before tax is K6 per unit. Following the increasing demand for steel, the Production department has proposed that the equipment be upgraded in order to meet the demand. An equipment upgrade can change the maximum capacity of the machine to 5,000 units per hour. The cost of this upgrade is K65 million, and it is expected that the machine will operate for a period of five years after which a new major investment will be required. The machine is expected to continue being operated at the current level of 40 hours per week at full capacity. The historical profit margins for the past five years are shown below:

Years 1 2 3 4 5

Profit margin per unit (ZMW) yr1=4.4 yr2=4.6 yr3=4.9 y4= 5.4 yr5= 6.0

Global has a beta of 1.22. The risk free rate is 7% and equity premium of 8%.

Cost of debt is 5.95% The profit margin per year is expected to increase in line with the historical profit margin growth rate of 8.0%. Corporate tax is payable in the year that taxable profits arise at 15% per year. Global uses WACC to evaluate their projects.

Assume 365 days in a year.

Required:

(A) Based on the above information, Calculate the following:

1) Net present value. (15 marks)

2) Internal rate of return. (5 marks)

3) Explain the results of each technique in (i) to (ii) above. (2 marks)

(b) State one weakness of each investment appraisal technique in (a) above. (3 marks)

(Total 20 Marks)