Reference no: EM132764758

Question -

a. Kirinyaga Construction Company is considering importing a ballast crushing machine from a USA Engineering Company. The machine is estimated to cost shs.200,000. This machine is expected to boost Kirinyaga limited' road construction projects across the country. Therefore it's expected to generate the following nominal annual pre-tax profits from the sale of crushed ballast.

Year Pre-tax profit

1 shs.85,000

2 shs.65,000

3 shs.75,000

4 shs.65,000

Kirinyaga Limited pays a corporation tax at a rate of 35 percent one year in arrears and also receives capital allowances on a 25 per cent reducing balance basis following a 40 per cent first year allowance. The expected life of the machine is four years, at the end of which it will be sold for 20,000. The Real after-tax cost of capital is 12% (Real rate) and inflation over the period has been estimated at 3% should the company buy the machine in the first place?

b. Game Ltd makes annual sales of 120,000 units at Sh10 per unit. The unit variable cost is Sh6. The company is considering changing its credit policy and this is expected to result to a 15% increase in sales. The increase in bad debts expenses is expected to be from 2% to 3% of the sales. Other working capital items apart from accounts receivable are expected to be 25% for the sales. The company incurs credit analysis of 10% of the sales and collection costs of 5% of the sales. The current credit terms are net 30 and the proposed terms are 2/10 net 30. The company expects 20% of the customers to take advantage of the cash discount. The opportunity cost of capital is 12%. Assume a 360-day a year.

Required - Advice the company on whether or not it should change its credit policy.