Kiwanda Limited is considering the purchase of a new machine.

Two

alternative machines, Pesi TZO and Upesi MO2, which will cost

Sh.6,000,000 and Sh.7,000,000 respectively are available in the market.

The cash flow after taxation of each machine are as follows:

Cash flow

Year

Pesi TZO

Sh.

Upesi MO2

Sh.

1

2

3

4

5

600,000

1,800,000

2,000,000

3,000,000

2,400,000

1,800,000

2,400,000

3,000,000

1,800,000

1,600,000

Required

a)

Compute the net present value of each machine.

(8 marks)

b)

Assuming that each machine represents a project:

Compute the return Kiwanda Limited expects to earn from

each of the two projects.

(10 marks)

Comment on the use of the results obtained in (a) and (b)(i)

above in selecting between the two projects.

(4 marks