Reference no: EM132829883

M Milling Company purchased machine X at a cost of Sh.5.8 million. The Machine has expected life of 5 years. It is being depreciated at 10% per year on Reducing balance method. The operational costs per year is expected to be sh. 80,000 and the manager's salary will be sh. 15,000 per month.

• Due to increased efficiency, the cashflows are expected to be Sh.1400,000 in the first two years then increase by 16% P.A in subsequent years. The salvage value of the Machine is estimated to be Sh.300,000 at the end of it is expected useful life if need then be reviewed later. The company's tax is 30% and the after-tax cost of capital is 12 %. The Machine will be installed using sh.350,000 and the transportation costs to the business premises will be sh. 45,000.

Required

Problem 1: Assess the suitability of this investment using both discounting and non-discounting methods.