1. **Problem Statement:** Kiwanda Ltd wants to decide between two machines, Pesi and Ikea, costing 6,000,000 and 7,000,000 respectively. We need to calculate the Net Present Value (NPV) of each machine's cash flows discounted at 12% per annum. 2. **Formula for NPV:** $$\text{NPV} = \sum_{t=1}^n \frac{CF_t}{(1+r)^t} - \text{Initial Investment}$$ where $CF_t$ is the cash flow at year $t$, $r$ is the discount rate (12% or 0.12), and $n$ is the number of years. 3. **Calculate NPV for Pesi:** - Year 1: $\frac{600,000}{(1+0.12)^1} = \frac{600,000}{1.12} = 535,714.29$ - Year 2: $\frac{1,800,000}{(1.12)^2} = \frac{1,800,000}{1.2544} = 1,434,027.78$ - Year 3: $\frac{2,000,000}{(1.12)^3} = \frac{2,000,000}{1.4049} = 1,423,611.11$ - Year 4: $\frac{3,000,000}{(1.12)^4} = \frac{3,000,000}{1.5735} = 1,907,348.63$ - Year 5: $\frac{2,400,000}{(1.12)^5} = \frac{2,400,000}{1.7623} = 1,361,111.11$ Sum of discounted cash flows for Pesi: $$535,714.29 + 1,434,027.78 + 1,423,611.11 + 1,907,348.63 + 1,361,111.11 = 6,661,812.92$$ NPV for Pesi: $$6,661,812.92 - 6,000,000 = 661,812.92$$ 4. **Calculate NPV for Ikea:** - Year 1: $\frac{1,800,000}{1.12} = 1,607,142.86$ - Year 2: $\frac{2,400,000}{1.2544} = 1,913,580.25$ - Year 3: $\frac{3,000,000}{1.4049} = 2,135,416.67$ - Year 4: $\frac{1,800,000}{1.5735} = 1,144,927.54$ - Year 5: $\frac{1,600,000}{1.7623} = 907,407.41$ Sum of discounted cash flows for Ikea: $$1,607,142.86 + 1,913,580.25 + 2,135,416.67 + 1,144,927.54 + 907,407.41 = 7,708,474.73$$ NPV for Ikea: $$7,708,474.73 - 7,000,000 = 708,474.73$$ 5. **Advice:** Since both NPVs are positive, both projects add value. However, Ikea has a higher NPV ($708,474.73$) compared to Pesi ($661,812.92$), so Kiwanda should select the Ikea machine for better profitability.