MJ Plc is considering investing in machinery costing K320,000 payable 50% now and the balance at the end of the first year. The new machine will have a four year life with K20,000 scrap value at the end of 4 years. The cost of market research spent todate is K60,000 Year 1 2 3 4 Demand (units) 50,000 65,000 52,000 45,000 The current selling price is K900 per unit and the variable cost of materials is K400 per unit. Other variable costs of production are K150 per unit. The above values are before adjusting for inflation. Selling price will increase by 5% per year while the variables of materials and other variable cost of production will increase by 4% per year. Fixed costs of production associated with the new machine will be K60,000 in the first year of production, increasing by K20,000 per year in each subsequent year of operation. The incremental fixed production cost is in nominal terms. The apportioned fixed cost (inclusive of depreciation) is K85,000 per year. Initial working capital will be K50,000 in year 1, rising to K150,000 in year 2, falling to K75,000 in year 3 and remaining at the year 3 level until the end of the project when it is all expected to be recovered. These values are in money terms. MJ pays tax at an annual rate of 25% payable one year in arrears. The firm can claim capital allowances (tax-allowable depreciation) on a 20% reducing balance basis. A balancing allowance is claimed in the final year of operation. MJ uses its after-tax weighted average cost of capital of 15% when appraising investment projects. Target payback period is 2 years 4 months. Required: a) Calculate the net present value of buying the new machine and advise on the acceptability of the proposed purchase (work to the nearest K1). b) Calculate the internal rate of return of buying the new machine and advise on the acceptability of the proposed purchase (work to the nearest K1). Page 3 of 3 c) Calculate the basic payback period of the project and comment on the results. d) Briefly discuss the genesis of good projects (where do they come from) and highlights the reasons why they are very difficult to maintain or sustain.