Hanex Limited is considering investing K50,000/- in a new machine with an expected life of five years. The machine will have no scrap value at the end of five years. It is expected that 20,000 units will be sold each year at a selling price of K3.00 per unit. Variable production costs are expected to be K1.65 per unit, while incremental fixed costs, mainly the wages of a maintenance engineer are expected to be K10,000/- per year. Hanex Limited uses a discount rate of 12% for investment appraisal purposes and expects investment projects to recover their initial investment within two years.

Required

(a)Calculate and comment on the payback period of the project. (4mark)

(b)Calculate and comment on the net present value of the project(4marks)

(c)Identify the limitations of the Net Present Value techniques when applied generally to investment appraisal. (12 marks)

Explain why risk and uncertainty should be considered in the investment appraisal process. ( 5 marks