Question

As a result of increased demand, the management of Nairobi Bottlers Company has the following options

OPTION 1 - Purchase a new equipment to increase the production and revenues. The inflow and outflow of cash associated with the new equipment for 5 years is given below:

Particulars

Amount (KES.)

Initial Cost of Equipment

375,000

Annual Cash Inflow

750,000

Annual Cash Outflows



Cost of ingredients

450,000

Salary expenses

135,000

Maintenance expenses

15,000

Depreciation

50,000



OPTION 2- Repair the existing equipment at an annual cost of KES. 10,000 and cash inflows of KES.100,000 for the next 5 years

Required

a)Given an interest rate of 12% in both situations, which option should they pursue (8 Marks)

b)Given a range of 10% - 14%, calculate the IRR for Option 1 (8 Marks)

c)Given reinvestment rate of 12% and finance rate of 14%. calculate the MIRR for Option 1 ​

Answer 1

Resposta:

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