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Pak Bakers Ltd$.,$ is considering to install a state$-$of$-$the$-$art oven. The expected life of this oven

is five years. The previous Finance Director has undertaken an analysis of the proposed project;

the summary of his analysis are shown below. He has recommended that the project should not

be undertaken because the estimated annual accounting rate of return is only $12\mathrm{.}3\%.$ But, you

think that accounting rate of return has its own flaws because it ignores the time value of

money. Moreover, it uses an arbitrary benchmark cut$-$off rate and it is based on book values

instead of cash flows and market values

Total initial investment is Rs$.9,600,000$ and average annual after tax profit is Rs$.1,182,000.$

All the above cash flow and profit estimates have been prepared in terms of present day costs

and prices, since the previous Finance Director assumed that the sales price could be increased

to compensate for any increase in costs

You have available the following additional information

i$.$Selling prices and overhead expenses are expected to increase by $5\%$ per year

ii$.$Material costs and labor costs are expected to increase by $10\%$ per year.

iii.Depreciation is allowable for taxation purposes against profits at $20\%$ per year on a straight

line basis

iv$.$Taxation on profits is at a rate of $35\%,$ payable in the same year

$v.$The fixed assets have no expected salvage value at the end of five years

vi$.$The company's real after$-$tax weighted average cost of capital is estimated to be $8\%$ per year,

and nominal after$-$tax weighted average cost of capital $15\%$ per year

Requirement:

Would it financially be viable for the Pak Bakers Ltd$.,$ to undertake the proposed oven project

$($show computation$)?$ Evaluate your results by using net present value method.

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