Reference no: EM132806108

Question - This project will require the acquisition of plant and machinery costing $2,250,000 which is payable immediately. This machinery will have a scrap value of $375,000 at the end of the 5 years. There is also $140,000 working capital to be used immediately. This amount has been taken from the company's retained profits and will be repaid at the end of the project. Cash inflows are expected to be $650,000 in year 1 rising at a rate of 7.5% per annum for years 2 to 5 inclusive. Variable costs in year 1 are expected to be $27,000 per annum and are expected to rise at 6.75% per annum. Capital allowances are available on the plant and machinery as follows:

$

Year 1 600,000

Year 2 390,000

Year 3 345,000

Year 4 300,000

Year 5 240,000

Corporation tax is paid at a rate of 20% and tax is payable one year in arrears.

The weighted average cost of capital is 10% and, unless otherwise stated, cash flows occur at the end of the year to which they relate.

A straight line method of depreciation at a rate of 20% is applied to all non-current assets.

Required - Calculate the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period.