Question
please help QUESTION ONE An investor is planning to buy an asset which will cost ksh 8,000,000. The asset has a useful life of 10
QUESTION ONE
An investor is planning to buy an asset which will cost ksh 8,000,000. The asset has a useful life of 10 years and will have a scrap value of 700,000 at the end of the tenth year. There is a 55% chance that the asset will bring in additional revenue of 15,000,000 per year and a 45% chance that the asset will bring in additional revenue of 5,000,000 per year for eight years and will incur additional costs of 900,000 per year for ten years. The machine will also require additional investment in working capital of 1,000,000 on installation. The tax rate is given as 30%. Assume that depreciation is at 20% per annum on a reducing balance method. The investors required rate of return is given as 10%:
Required
a) Determine cash flows from this project. (7Marks)
b) Determine the NPV of the project and give your comment. (8Marks)
QUESTION TWO
a) Kapanzola Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30, in order to speed up collections. At present, 60% of kapanzolas customers take the 2% discount. Under the new terms, discount customers are expected to rise to 60%. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, while the remainder will pay 10 days late. The change does not involve the alteration of credit standards and therefore bad debt losses are not expected to rise above their present 2% level. However, the more generous cash discount offer is expected to increase sales from sh 1m to sh 2.2m per year. The variable cost is 70% and the interest rate of funds invested in accounts receivable is 12%. Should the company change its credit terms (8Marks)
b) Naivas ltd is targeting Uchumi supermarket ltd for a hostile takeover. The management of Uchumi Supermarket ltd is considering which defense mechanism to use in order to block the acquisition. Briefly explain to the management of Naivas ltd any three defense strategies applicable in a hostile takeover situation. (7Marks)
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