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QUESTION THREE Bandika Company manufactures concrete blocks. The company is considering replacing part of the current manual labour force by purchasing a small tractor with
QUESTION THREE Bandika Company manufactures concrete blocks. The company is considering replacing part of the current manual labour force by purchasing a small tractor with a forklift for use in loading blocks. The purchase price would be Sh. 1,570,000. The tractor will have an economic life of 4 years. After the fourth year, the tractor could be sold for Sh. 110,000 though it it's expected to have a residual value of Sh 70,000. The company estimates it will cost Sh. 150,000 per year to operate the tractor. It will, however, save Sh. 230,000 annually on labour cost. Because of increase in handling efficiency, losses caused by breakages will be cut by Sh. 240,000 per year. Sales will also go up by annually by Ksh 300,000. Working capital of 300,000 will be required to support increased sales at beginning of the project. Working capital will be increased by Ksh 50,000 per year. Assume the company's gross margin ratio (profit/ sales) is 40%, corporate rate 30%, and capital gain tax is 20%. Also assume straight-line method of depreciation. Required: Compute i. Initial capital outflow ii. Incremental annual cash flows for the third year of operation iii. Terminal cash flows
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