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Nchanga Demolishers Limited intends to purchase a new demolishing machine. The following information is available: Cost of machine: K120,000,000 Expected useful life: 6 years Scrap

Nchanga Demolishers Limited intends to purchase a new demolishing machine. The following information 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%

Yearly Cash Flows and Profits:

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:

a) What are relevant costs in investment appraisal decision-making? b) Contrast the payback period and accounting rate of return (ARR). c) Using the information above, calculate the following:

  • i) Payback period for the new machine in months.
  • ii) Net present value (NPV) for the new machine and advise if Nchanga Demolishers Limited should invest in this machine.

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