Should the company buy the machine in first place

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Reference no: EM132754618

Kirinyaga Construction Company is considering importing a ballast crushing machine from a USA Engineering Company. The machine is estimated to cost shs.200,000. This machine is expected to boost Kirinyaga limited' road construction projects across the country. Therefore it's expected to generate the following nominal annual pre-tax profits from the sale of crushed ballast.

Year Pre-tax profit

1 shs.85,000

2 shs.65,000

3 shs.75,000

4 shs.65,000

Problem 1: Kirinyaga Limited pays a corporation tax at a rate of 35 percent one year in arrears and also receives capital allowances on a 25 per cent reducing balance basis following a 40 per cent first year allowance. The expected life of the machine is four years, at the end of which it will be sold for 20,000. The Real after-tax cost of capital is 12% (Real rate) and inflation over the period has been estimated at 3% should the company buy the machine in the first place?

Reference no: EM132754618

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