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1. Liv Enterprises is considering a national launch of 2 corn chip products under project A and B. The national launch will require the following investments:

Additional manufacturing equipment; Project A: K900,000.00 and Project B: K1,000,000.00

Upgrading existing facilities; Project A: K100,000.00 and project B: K400,000.00 Both of the above would be paid for at the outset and would be depreciated in the accounts over a five year period using straight line with a residual value for both Project A and B of zero.

Projected revenues and costs over a period of five years are given in table below:

                                                                        PROJECT A

YEAR

REVENUE

COSTS

1

K1200000

1340000

2

K2000000

K1670000

3

K2000000

K1520000

4

K2250000

K1685000

5

K2250000

K1685000

                                                                         PROJECT B

YEAR

REVENUE

COSTS

1

K1300000

K1460000

2

K2100000

K1520000

3

K2200000

K1400000

4

K2400000

K160000

5

K2500000

K1720000

Required:

(i) Appraise the two projects through the use of Accounting Rate of Return and suggest which of the two offers a better option. Please note that the above costs do not include depreciation.

(ii) results increasingly suggest that Discounted Cash Flow (DCF) techniques are a better way to appraise investment projects as compared to payback method. Summarize reasons why this might be so.

2. In the procurement agreements so signed in question 1 above, explain and give four legal reasons through which these 2contracts can be discharged or terminated.

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