Question
). Sona Plastics Company has been dumping in the local council waste collection centre some 50,000 Kg of unusable chemicals each year. In addition to
). Sona Plastics Company has been dumping in the local council waste collection centre some 50,000 Kg of unusable chemicals each year. In addition to being an eyesore, the residents of a nearby estate have started complaining of bad odour emanating from the dump and suspect that the company is to blame. The company has received information that these chemicals can be recycled at relatively little cost. The equipment to do it is however rather expensive and, in addition, the chemicals recovered are of a relatively poor quality. Investigations have shown that these chemicals can be sold to another firm at an average price of shs. 50 per kg. The direct cost of recycling has been calculated at shs. 30 per Kg. But this is before depreciation and taxes. The equipment for this process has an expected life of 12 years and a current cost of 4 million. At the end of the ten years, it will be virtually worthless. For financial analysis, the company uses the straight-line method of depreciation and an average tax rate of 50%. It has a required rate return of 20%. Required: (i). Compute the projects net present value (4 MARKS) (ii). Compute the internal rate of return (4 MARKS) (iii). Should this project be undertaken? Explain (2 MARKS) (iv). Give TWO reasons to justify the conflict of thinking between NPV and IRR in selection of projects.
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