The Weka Company limited has been considering the criteria that must be met before a capital expenditure proposal can be included in the capital expenditure programme.

The screening criteria established by management are as follows:

No project should involve a net commitment of funds for more than four years.

Accepted proposals must offer a time adjusted or discounted rate of return

at least equal to the estimated cost of capital. Present estimates are that

cost of capital as 15 percent per annum after tax.

Accepted proposals should average over the life time, an unadjusted rate of

return on assets employed (calculated in the conventional accounting

method atleast equal to the average rate of return on total assets shown

by the statutory financial statements included in the annual report of the

company.

A proposal to purchase a new lathe machine is to be subjected to these

initial screening processes. The machine will cost Sh.2,200,000 and has an

estimated useful life of five years at the end of which the disposal value will

be zero. Sales revenue to be generated by the new machine is estimated

as follows:

Year Revenue(Sh.'000')

1,320

1,440

1,560

1,600

1,500

Additional operating costs are estimated to be Sh.700,000 per annum. Tax rates may be assumed to be 35% payable in the year in which revenue is received.For taxation purpose the machine is to be written off as a fixed annual rate of 20% on cost.

The financial accounting statements issued by the company in recent years

shows that profits after tax have averaged 18% on total assets.

Required:

Present a report which will indicate to management whether or not the proposal to purchase the lathe machine meets each of the selection criteria. (19 marks)