QuestionGet AnswerThe management of ABC Ltd anticipates purchasing one of the pump models

below. Each model has an initial cost outlay of Ksh 15,000 and a useful life of 5 years.

The corporation tax rate is 30% and the required rate of return is 10%. The pumps are depreciated using straight line method. The before tax and depreciation cash flows expected to be generated by the projects are as follows:

Year

1

2

3

4

5

Model I

8,000

8,000

6,000

5,000

4,000

Model II

6,000

6,000

6,000

6,000

6,000

Required:

a)     Determine the cash flows after tax

b)     Compute the AAR, PBP, NPV, PI and IRR for each project

c)     Advice the management on the pump model to purchase

Kindly show me how this is done.