Mumias Milling Company purchased a grinder at a cost of Sh.5.5 million. The grinder has...
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Accounting
Mumias Milling Company purchased a grinder at a cost of Sh.5.5 million. The grinder has expected life of 6 years.It is being depreciated at 12% per year on cost. The operational costs per year is expected to be sh. 150,000 and the manager's salary will be sh. 20,000 per month.
Due to increased efficiency, the profit before depreciation is expected to increase by Sh.1400,000 every year till the usage is expired. The salvage value of the grinder is estimated at Sh.310,000 at the end of it is expected useful life. The company's tax is 30% and the after-tax cost of capital is 10 %. The grinder will be installed at sh.350,000 and the transportation costs to the business premises will be sh. 45,000.
Required
Assess the suitability of this investment using both discounting and non-discounting methods.
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