Rosy Bakery specializes in making cakes and other pastries. The company is considering purchase of a new machine for putting icing and other toppings on pastries. Currently these processes are done manually. The machine costs Sh.465,000 Installation costs are estimated at Sh.15,000. The machine will have an economic life of 6 years but would require an overhaul at the end of the fourth year. The overhaul will cost Sh.37,500. After six years the machine could be sold for Sh.30,000. The company uses straight line method of depreciation and is in the 40% income tax bracket. The bakery estimates that it will cost Sh.70,000 per year to operate the new machine. The present manual method of putting topping on pastries costs Sh.175,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 4,000 packages per year. The bakery realizes a contribution margin of Sh.30 per package. It requires 16% return on all investments in equipment.

Required:

(a)Calculate the annual cash inflows before tax that will be provided by the new machine.

(b)Using the net present value (NPV) method, calculate the project's NPV and state whether or not the machine should be purchased by the bakery.