Hamisi Company ltd purchased a packing machine $4$ years ago at a cost of Sh$\mathrm{.}13\mathrm{.}5$ million. The Machine had a life of $9$ years at the time of purchase. The company is considering replacing it with a new packing machine costing Sh$\mathrm{.}18$ million with an expected useful life of $5$ years. Due to increased efficiency, the sales are expected to increase by Sh$.2,550,000$ a year, the labor costs would decrease by

Sh$.1,260,000$ per year while the maintenance costs would increase at the following rate:

Year maintenance Costs

$1150,000$

$2330,000$

$3405,000$

$4435,000$

$5504,000$

The salvage value of the new packing machine is estimated at Sh$.2,057,022\mathrm{.}28.$

The market value of the old machine, today, is Sh$\mathrm{.}10\mathrm{.}5$ million. It is estimated to

have a zero salvage value after $5$ years. The company$$s tax is $30\%.($Assume

depreciation has no effect$).$ The company$$s capital structure is as shown in the

following table.

Source of Capital

$100,000$ Ordinary shares @$100/-=10,000,000\mathrm{.}00$

$10\%$ Loan Stock $=6,000,000\mathrm{.}00$

$8\%$ Preference Shares $=4,000,000\mathrm{.}00$

Total $20,000,000\mathrm{.}00$

The expected ordinary share dividend was Ksh $31\mathrm{.}20$ per share while the current

market price is double the par value. The shares are expected to grow at a

constant rate of $5\%$

Required

a$)$ Compute Hamisi Company Ltd$$s average cost of capital $(4$ Marks$)$

b$)$ Hamisi Company ltd prefers NPV approach in appraising their projects.

Advise Hamisi ltd on whether the new grinder should be bought. $(6$ Marks$)$