TTCL Co plans to buy a new machine to meet expected demand for a new product, Product Y$.$ This machine will cost TZS $250,000$ and last for four years, at the end of which time it will be sold for TZS $5,000.$ TTCL Co$.$ expects demand for product Y to be as follows:

Year $1234$

Demand $($units$)35,00040,00050,00025,000$

The selling price for product Y is expected to be TZS $12$ per unit and the variable cost of production is expected to be TZS $7\mathrm{.}80$ per unit. Incremental annual fixed production overheads of TZS $25,000$ per year will be incurred. Selling price and costs are all in current price terms,

Selling price and costs are expected to increase as follows:

Increase

Selling price of product T $3\%$ per year

Variable cost of production $4\%$ per year

Fixed production overheads $6\%$ per year

Other information:

TTCL Co has a real cost of capital of $5\mathrm{.}7\%$ and pays tax at an annual rate of $30\%$ one year in arrears. It can claim capital allowances on a $25\%$ reducing balance basis. General inflation is expected to be $5\%$ per year.

TTCL Co has a target return on capital employed of $20\%.$ Depreciation is charged on a straight$-$line basis over the life of an asset.

Required:

a$)$ Calculate the net present value of buying the new machine and comment on your findings.

b$)$ Calculate the before tax return on capital employed $($accounting rate of return$)$ based on the average investment and comment on your findings.

c$)$ Discuss the strengths and weaknesses of internal rate of return in appraising capital investments.