QUESTION ONE The Shome Corporation, a firm in the 30 percent tax bracket is considering a new project This project invol

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Question One The Shome Corporation A Firm In The 30 Percent Tax Bracket Is Considering A New Project This Project Invol 1 (135.12 KiB) Viewed 13 times

QUESTION ONE The Shome Corporation, a firm in the 30 percent tax bracket is considering a new project This project involves the introduction of a new product. This project is expected to last 5 years. The following information is availed relating to the project. Cost of new equipment. Ksh 6,900.000 Ksh 300,000 Shipping and installation costs: Conveyor system to be attached to the machine Ksh 240,000 The new equipment was discovered to have a faulty electric wiring system before equipment was installed. A new system was fitted at cost of Ksh 180.000 Ksh 120,000 Training cost on the use of the machine Initial working capital items O Account Payables Ksh 50,000 Ksh 70,000 Prepayments Inventory Ksh 100,000 Sales are projected as follows Period project sales (units) 1 80,000 2 100,000 3 120,000 70,000 50.000 Research and development costs incurred to develop the new product was Ksh 800.000 A unit of final product will sell at Ksh 550/unit in years 1. Price will increase by 3% per year . Variable cost of producing a unit will be Ksh 460/unit. This will remain constant throughout the equipment life N Annual cash operating costs is Ksh 2.500.000 . investment in net working capital will increase at 8 percent per year. The addition investment in working capital will made at year end 60% closing working capital will be recovered at the end of the project • Equipment will be depreciated using straight lime method over 5 years with a salvage value of Ksb 800,000 Bequired... a. Compute initial capital investment b. Compute the annual cashflows . Compute the terminal value 20 MARKS