QUESTION ONE PEP Ple is a Zambian manufacturing company that intends to launch a new product The new product will require investment to be made in additional manufacturing facilities. The amount required for investment is K2,000,000 in new plant and machinery and K1,200,000 in building an extension to the factory The plant and machinery will have a residual value of K500,000 at the end of the estimated useful economic life of five years. It will be depreciated on a straight line basis over the five years period. The extension to the factory will not be depreciated. After the investment has been made at the start of the first year, future annual net profits after depreciation are expected to be as follows: Year 2 Year 3 Year 4 Year 5 K K K K K Net profit 495,000 653,000 852,000 579,000 345,000 The following additional information is available: (1) PEP Pic has a target Accounting Rate of Return on new investments of 30% based on average investment (2) PEP Plc has a cost of capital of 10% and this cost of capital is suitable for appraising the proposed investment to enable the launch of the new product (3) PEP Pic requires projects to pay back within three years on a non-discounted cash flow basis and within four years on a discounted cash flow basis. Year 1 Required: (a) Calculate the following values for the proposed investment. (0) Accounting Rate of Return (ii) Net Present Value (ili) Pay Back Period to the nearest month. (iv) Discounted Pay Back period. [4 Marks] [8 Marks] [3 Marks] [3 Marks] {b) Based on the results in part (a) above, advise management of PEP Plc whether the proposed investment should be undertaken [6 Marks]