QUESTION ONE a) Kizin Co is evaluating a planned investment in a new product costing Kshs.40m, payable at the start of the first year of operation. The product will be produced for four years, at the end of which production will cease. The investment project will have a terminal value of zero. Financial Information relating to the investment project is as follows: Year Sales volume (units/year) Selling price (Kshs/unit) Fixed cost (Kshs/year) 1 880,000 26.50 1,100,000 2 1,100,000 28.50 1,121,000 3 1,440,000 30.00 1,155,000 4 800,000 26.00 1,200,000 These selling prices have not yet been adjusted for selling price inflation, which is expected to be 3-0% per year. The annual fixed costs are given above in nominal terms. Variable cost per unit depends on whether competition is maintained between suppliers of key components. The purchasing department has made the following forecast Competition Probability Variable cost (Kshs/unit) Strong 35% 10.80 Moderate 45% 12.00 Weak 20% 14.70 The variable costs in this forecast are before taking account of variable cost inflation of 3-5% per year. Kiziri Co can claim tax-allowable depreciation on a 25% per year reducing ance basis on the full investment cost of Kshs.40m and pays corporation tax of 30% per year one year in arrears. It is planned to finance the investment project with an issue of 8% loan notes, redeemable in ten years' time. Kiziri Co has a nominal after-tax weighted average cost of capital of 10%, a real after-tax weighted average cost of capital of 7% and a cost of equity of 11%. Required: Calculate the expected net present value of the investment project and comment on its financial acceptability and on the risk relating to variable cost. (10 marks) b) "Behavioral portfolio theory (BPT), provides an alternative to the assumption that the ultimate motivation for investors is the maximization of the value of their portfolios". Required With the aid of practical examples/evidence, briefly critique the above statement. marks) (10