a). Discuss the steps involved in the capital budgeting process (6 marks) b). The director of finance has asked you the managerial economist to analyze proposed projects. The projects, A and B have costs of Kshs. 20,000 and Kshs. 25,000 respectively and a cost of capital of 12 % . The proposed projects expected net cash flows (in Kshs.) are as follows; & Expected Net Cash Flow Year & Project A & Project B 0 & -20,000 & -25,000 1 & 4,000 & 8,000 2 & 6,000 & 6,000 3 & 6,000 & 5,000 4 & 7,000 & 6,000 5 & 6,000 & 8,000 For each project, compute the measures below and advise the director. i). The Payback period (PIS). [3 marks] ii). Net Present Value (NPV). [3 marks] iii). Internal Rate of Return (IRR). (3 marks) QUESTION FIVE a). Distinguish between implicit and explicit costs. (4 marks) b). Explain the meaning of cross-price elasticity of demand and clearly explain its value for substitutes and complementary commodities. (6 marks) c). Explain using illustrations the difference between economies and diseconomies of scale. (5 marks) QUESTION SIX a). The management of Pronto Holdings has completed a study of weekly demand for its colfee in 48 regional outlets. The study revealed that: Q=400-1,200 P+0.8 A+55 P q+800 P . Where Q is the number of cups of colfee sold per outlet per week

a) The steps involved in the capital budgeting process are as follows:<br /><br />1. **Identify potential investment opportunities:** This involves identifying potential projects or investments that align with the company's strategic goals and objectives.<br /><br />2. **Evaluate the feasibility of the projects:** This step involves assessing the viability of the proposed projects by analyzing factors such as the expected cash flows, costs, and risks associated with each project.<br /><br />3. **Perform financial analysis:** This step involves conducting various financial analysis techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index to evaluate the financial viability of the projects.<br /><br />4. **Make a decision:** Based on the financial analysis, the management team will make a decision on whether to proceed with the project or not.<br /><br />5. **Implement the project:** Once the decision is made, the project will be implemented, and the necessary resources will be allocated.<br /><br />6. **Monitor and evaluate the project:** After the project is implemented, it is important to monitor its progress and evaluate its performance against the expected outcomes. This will help in making any necessary adjustments or improvements.<br /><br />b) i) Payback period (PIS):<br /><br />For Project A:<br />The payback period is the time it takes for the project to generate enough cash flows to recover the initial investment. In this case, the initial investment for Project A is Kshs. 20,000. By adding the net cash flows for each year, we can see that the cumulative cash flow becomes positive in the second year. Therefore, the payback period for Project A is 2 years.<br /><br />For Project B:<br />Similarly, the initial investment for Project B is Kshs. 25,000. By adding the net cash flows for each year, we can see that the cumulative cash flow becomes positive in the third year. Therefore, the payback period for Project B is 3 years.<br /><br />ii) Net Present Value (NPV):<br /><br />To calculate the NPV, we need to discount the expected net cash flows to their present value using the given cost of capital of 12%. The NPV formula is:<br /><br />NPV = Σ (Net Cash Flow / (1 + Discount Rate)^Year)<br /><br />For Project A:<br />NPV = (-20,000 / (1 + 0.12)^0) + (4,000 / (1 + 0.12)^1) + (6,000 / (1 + 0.12)^2) + (6,000 / (1 + 0.12)^3) + (7,000 / (1 + 0.12)^4) + (6,000 / (1 + 0.12)^5)<br /><br />For Project B:<br />NPV = (-25,000 / (1 + 0.12)^0) + (8,000 / (1 + 0.12)^1) + (6,000 / (1 + 0.12)^2) + (5,000 / (1 + 0.12)^3) + (6,000 / (1 +.) + (8,000 / (1 + 0.12)^5)<br /><br />iii) Internal Rate of Return (IRR):<br /><br />The IRR is the discount rate at which the NPV of the project becomes zero. It represents the expected rate of return on the project. To calculate the IRR, we need to find the discount rate that makes the NPV equal to zero.<br /><br />For Project A:<br />By using trial and error or financial calculators, we can find the IRR for Project A.<br /><br />For:<br />Similarly, we can find the IRR for Project B.<br /><br />QUESTION FIVE<br /><br />a) Implicit costs are the opportunity costs associated with using resources owned by the firm, while explicit costs are the direct monetary payments made by the firm for using resources owned by others.<br /><br />b) Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. If the cross-price elasticity is positive, the goods are substitutes, meaning that an increase in the price of one good will lead to an increase in the quantity demanded of the other good. If the cross-price elasticity is negative, the goods are complements, meaning that an increase in the price of one good will lead to a decrease in the quantity demanded of the other good.<br /><br />c) Economies of scale refer to the cost advantages that a firm can achieve as it increases its scale of production. This means that as the firm produces more, the average cost per unit decreases. Diseconomies of scale, on the other hand, occur when the firm's average cost per unit increases as it increases its scale of production. This can happen due to factors such as increased bureaucracy, coordination problems, or inefficiencies in managing a larger organization.<br /><br />QUESTION SIX<br /><br />a) The given equation \( Q=400-1,200 P+0.8 A+55 P q+800 P \) represents the number of cups of coffee sold