1. Kitwe Steel is a publicly traded steel company with an ageing steel plant. It currently generates K 1 million in annual pre-tax operating income on revenues of K 50 million from the plant; the annual depreciation charge is K 500,000. With no additional capital investments, the plant can be expected to continue to generate the same operating income and depreciation for the next 5 years and have no salvage value at the end of that period. Kitwe Steel is considering scrapping the existing plant for todays book value and upgrading it by investing K 10 million today; the amount can be depreciated straight line over the next 10 years. The upgrade will increase the annual pre-tax operating income to K 2.5 million and extend the life of the plant to 10 years, with no salvage value at the end. The marginal tax rate is 40% and the cost of capital is 10%.
2. Estimate the initial investment (year 0), net of salvage from the old plant.

(3 marks)

2. Estimate the incremental annual after-tax cash flows for years 1-5.

(5 marks )

3. Considering all relevant cash flows, estimate the NPV of upgrading the plant today. (7 marks)