Reference no: EM132616273
a) Mayfair Limited intends to introduce a new product, T, into the market. This will require an investment in machinery costing Sh 2,400,000. The machinery is estimated to have a useful life of four years with a terminal value of Sh 600,000.
Additional information;
1. Capital allowances will be provided on the machinery at a rate of 12.5% per annum on a reducing balance basis. At the end of the useful life of the machinery a balancing charge or allowance will arise equal to the difference between the scrap proceeds and the tax written down value.
2. Annual profits from the sale of product T will amount to Sh 960,000 before deducting depreciation on machinery.
3. Corporation tax at a rate of 30% is payable one year after the end of the accounting year in which the tax was charged.
4. An investment in working capital amounting to Sh 240,000 will be required on commencement of the project. This amount will however be recovered on completion of the project.
5. The start of the project coincides with the start of the company's financial year.
6.The cost of capital is 15%per annum.
Required;
problem 1: Using the net present value approach advice the management on the suitability of the project
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