killo Ltd. intends to invest in one of two new machines. A feasibility study for this investment was carried out three months ago costing 6,000 and this is included in the cost of the machine.

The machine costs 36,000 and it has a scrap value of 8,000.

In addition, the opportunity costs of purchasing this machine are estimated at 2,000 per year. Working capital for this project will amount to 5,000.

The company uses a 9% discount rate.

Net operating cashflows for the investment.Year 113,000Year 218,000Year 320,000

4a) For a cost to be relevant it has three qualities, what are they? (3 marks)

4b) Calculate the Net Relevant Cashflows for Year 0, Year 1, Year 2 and Year 3 (10 marks)

4c) Using the net relevant cashflows (from your answer to 3b), calculate:

1. The Payback Period
2. The Net Present Value (6 marks)

4d) Discuss:

1. the meaning of a discount rate and
2. the problems with using one (6 marks).

Present value of 1At rate 8%9%10%Period (years) 10.9260.9170.90920.8570.8420.82630.7940.7720.75140.7350.7080.68350.6810.6500.621