QUESTION ONE Epica PLC is considering marketing a new product with a four-year life. Epica will need to install new equipment to manufacture the product. Epica has to choose between two machines both of which would be suitable. Machine 1 costs K460,000 to purchase and install, and will have a residual value of K20,000 at the end of four years. Machine 2 costs K630,000 to purchase and install, and has a residual value of K30,000 at the end of four years. Machine 2 takes slightly longer to install and commission, but once in operation it has slightly lower operating costs per unit, and will eventually produce more output The following projections have been prepared of the cash flows from product sales and operating costs for the two machines: Year 1 Year 2 Year 3 Year 4 Machine 1 Sales K'000 Costs K'000 1,340 1,160 1,460 1.260 1,300 1,140 820 760 Machine 2 Sales K'000 Costs K'000 700 610 1,400 1,100 1,600 1,240 900 750 The company's cost of capital is 12% p.a. All capital investments have to achieve a payback period of three years or less. Required: Using the NPV method and paying attention to the condition set on payback, do calculations to show which project should be accepted, and advise the management. Total (20 marks) QUESTION TWO Mikalanga Ltd is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 18% during the next two years, 15% in the third year and at a constant rate of 6% thereafter. Mikalanga's last dividend, which has just been paid, was K1.15. If the required rate of return on the stock 12%, what is the price of a share of the stock today? Total (10 marks) QUESTION THREE Kate Bwalya wishes to retire in 30 years' time and has estimated that she will require a monthly pension income of K24,000 per month for 20 years subsequent to retirement. Kate will contribute to a retirement fund which will enable her to take out a monthly 2 pension of K24,000 after retirement. The retirement fund is currently earning a return of 9% per annum, interest compounded monthly, and this level is expected to remain unchanged and to be sustainable over the next 50 years. Determine the monthly contribution that Kate is required to make to the retirement fund over the next 30 years. Total (20 marks)