The company is planning to acquire an additional machine at a cost of 8M which will have a useful life of 4 years and a maximum output of 600,000 units. The Scrap value after four years will be Ksh.300,000. The current selling price of fix it is Ksh. 80 per unit and the variable cost is Ksh. 50 per unit.
Other variable costs of production is Ksh. 19, fixed cost of production associated with the new machine will be Ksh 2.4M per year in each subsequent year of production increasing by ksh 200,000 per year in each subsequent year of operation.
Mavoko pays tax one year in arrears at an annual rate of 30% and can claim capital allowance 25% reducing balance basis. A balancing allowance is claimed in the final year of operation.
The cost of equity for Mavoko ltd is 10% while it pays an interest of 8.6% on its debts. Its long-term finance is made up of up to 80% equity and 20% debt.
Calculate the Net Present Value for this Project and advice the management of mavoko whether this project is financially viable.
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