Nchanga Demolishers Limited intends purchasing a new demolishing machine. The following information relating to the machine is available.

• Cost of machine: K120,000,000
• Expected useful life: 6 years
• Scrap value: K80,000,000
• Method of depreciation: Straight line
• Cost of Capital: 14%

Year	Cash flow	Profit
1	20,000,000	2,000,000
2	24,000,000	6,000,000
3	56,000,000	38,000,000
4	40,000,000	22,000,000
5	60,000,000	42,000,000

Requirements:

1. What are relevant costs in investment appraisal decision making?
2. Contrast between payback period and accounting rate of return (ARR).
3. Using the information in the case study above, calculate the following: a. Payback period for the new machine in months. b. Net present value (NPV) for the new machine and advise if Nchanga Demolishers Limited should invest in this machine.