NAME REG.

NO
ISAC MAHUVI IMC/BTX/2011256
AMBROSE MUSHI IMC/BTX/2010408
ANJELA MUSHI IMC/BTX/2020682
INOCENT MUSHI IMC/BTX/2010496
KOBWA MORICE IMC/BTX/2020648
MCHILO ABDALLAH IMC/BTX/2021089
AZIZA MADUWA IMC/BTX/2022101
SALMA YUNUS IMC/BTX/2020471
KENEDY MAZENGO IMC/BTX/2010546
DAPHROSA NDEMBIKIO IMC/BTX/2020864

Question One
Payback period method is the number of periods required to recover the origin investment, as is
the method used to evaluate alternative investment, as the shorter the payback method the more
preferred capital investment project.
Solution

YEAR PROJECT A PROJECT B

0 (10,000,000) (10,000,000)
1 7,500,000 4,000,000
2 2,000,000 4,000,000
3 1,500,000 4,000,000
4 1,000,000 4,000,000

DATA GIVEN
PROJECT A
By summing cash flow of the investment, we get year three as the full recovery year to reach the
initial cost of the investment
7,500,000+2,000,000+1,500,000=11,000,000
Initial cost=10,000,000
Summation of cash flow before year of recovery=9,500,000
Cashflow of recovery year=1,500,000
FORMULA
Payback period= (year of recovery-1) +
cost of initial investment −∑ cashflow before year of recovery
cashflow of year of recovery
10,000,000−9,500,000
Payback period= (3-1) +
1,500,000
Payback period = 2.3 years

PROJECT B
Year of recovery=3
Initial cost of the investment= 10,000,000
Sum. Of cashflow before year of recovery= 8,000,000
Cashflow of recovery year= 4,000,000
Payback period= (year of recovery-1) +
cost of initial investment −∑ cashflow before year of recovery
cashflow of year of recovery
10,000,000−8,000,000
Payback period= (3-1) +
4,000,000
Payback period = 2.5 years
Interpretation
So, project A is more preferable than project B because of its shorter payback period.

QUESTION TWO
Net present value method is the difference between the net present value of cashflow inflows
and cash outflows. It was established due to the shortcoming of the pay back method and
discounting payback method, project with higher net present value are more preferable than
those with lower net present value method.
Solution
Data given
Corporate income tax rate= 38%
Annual profit=10,000,000
Cash outlay=30,000,000
Annual interest =10%
Depreciation=5000000
Discounting factor = (1+i) ^n where n=1,2,3…. n
Annul Income after depreciation = Annual Profit-Depreciation
= 10,000,000-5000,000
= 5,000,000
Annual tax = 38%*5,000,000
Annual tax = 1,900,000
Annual Income after tax = 10,000,000-1,900,000
Annual Income after tax = 8,100,000
Then,
∑ income after tax for each year
Net present value of the firm = – initial cash outlay
( 1+i )n , n=1,2,3 … . n
8,100,000 8,100,000 8,100,000 8,100,000 8,100,000
NPV = ( + + + + ¿-
( 1+ 0.10 )1 ( 1+ 0.10 )2 ( 1+ 0.10 )3 ( 1+ 0.10 )4 ( 1+0.10 )5
30,000,000
NPV = 30,705,372.83-30,000,000
NPV = 705,372.83
INTERPRETATION
Then kijenge should build the new processing plant since its net present value is positive