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(b)Microlin Ltd intends sot introduce a new product, T, into the market. This will require an 

investment in machinery costing Sh. 2,400,000. The machinery is estimated to have a useful 

life of four years with a terminal value of Sh600,000.

Additional information

1. Capital allowances will be provided on the machinery at a rate of 12.5% per annum 

on a balance basis. At the end of the useful life of the machinery, a balancing charge or 

allowance will arise equal to the difference between the scrap proceeds and the tax 

written down value.

2. Annual profits from the sale of product T will amount to Sh960,000 before deducting 

depreciation on machinery.

3. Corporation tax at a rate of 30% is payable one year after the end of the accounting 

year in which the tax was charged.

4. An investment in working capital amounting to Sh.240,000 will be required on 

commencement of the project. 

This amount will however be recovered on completion of the project.

1. The start of the project coincides with the company's financial year.

2. the cost of capital is 15% per annum

Required:

Using the net present value (NPV) approach, advice the management on the suitability of 

the project. (10 marks)