Reference no: EM132529022

Mwongozo Limited has approached you for advice on an equipment to be purchased for use in a five-year project. The investment will involve an initial capital outlay of Shs. 1.4 million and the expected cash flows are given below:

Year           Cash inflows             Cash outflows

                      Shs.                   Shs.

1                800,000                  65,000

2               750,000                 80,000

3              900,000                  50,000

4            1,200,000                   55,000

5          1,100,000                     70,000

The equipment is to be depreciated on a reducing balance basis at 10% p.a over the duration of the project with sh.200,000 residual value. The cost of capital and the tax rate are 12% and 30% respectively.

Required:

Question 1: What will be the internal rate of return of this project?

Question 2: Are there some practical difficulties you will encounter when making such capital budgeting decisions?