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QUESTION TWO A company is in the process of evaluating a project to be considered...

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Accounting

QUESTION TWO A company is in the process of evaluating a project to be considered for investment. Notes: 1. Initial investments in year 0 consist of purchase cost of machine K210m, freight costs, K40m, installation costs for the project K34m. 2. Year 1 sale units are 2000 priced at K400, 000 each. 3. Year 1 incremental costs are K200m. 4. Year 1 fixed operating costs are K150m. 5. It is anticipated that the project will not go beyond year 1 and a salvage value of K14m is expected. 6. As a result of this project tax savings for the company during this period are expected to be K8m. 7. The cost of capital for the project is 12% Required: a) Calculate the NPV for this project and comment on the viability b) Compute the sensitivity of (initial cost, Sales, incremental costs and fixed costs) in this project and identify which variable is most critical.

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