Question Two $(13$ Marks$)$

a$)$ The management of Biashara Ltd is in the process of evaluating alternative machine models,

Alpha and Beta for possible purchase in order to increase the company$$s production level. The

following additional information is available;

i$)$ Alpha costs Kshs $4,000,000$ and will have a useful life of five years,

ii$)$ Beta costs Kshs $8,000,000$ and will have a useful life of five years,

iii$)$ Both machines have no salvage value after their useful life

iv$)$ An investment is working capital amounting to Kshs $800,000$ will have to be made at the

beginning of the first year of the machine$$s life regardless of the model purchased.

v$)$ The estimated pretax cash inflows for each of the machines are as shown below:

The cost of capital to the company is $12\%$ and the corporation tax rate $30\%.$

Required:

Assess the suitability of the capital projects using the following methods:

i$)$ Pay Back period, $(2$ marks$)$

ii$)$ Net Present Value, and, $(3$ marks$)$

iii$)$ Profitability Index Method $(2$ mar