Reference no: EM132933406

Gryffindor plc has conducted Market Research costing £5,000 which will allow the company to advertise their new to market product more effectively.

• In order to start producing a new product, further investment in machinery of £60,000 would be needed. The machinery would have an expected life of 5 years, and a residual value of £11,000.
• Tax depreciation allowances will be claimed at 25% on a reducing balance basis, up until the year of disposal, when a balancing allowance will arise.
• The revenue is forecast to be £50,000p.a. in real terms, and costs are forecast to be £20,000 p.a. in real terms.
• Working capital will need to be £5,000 at the start of the project, and will remain at current prices (in nominal terms) therefore the working capital requirement will increase in line with inflation each year.
• At the end of the project, all working capital invested to date will be released.
• Inflation is forecast to be 2% p.a. over the next few years and the firm's real cost of capital is 6% p.a.
• The tax rate is 30%, and tax is payable the year after that profit is earned.

Required:

Problem a) Use the Net Present Value method to assess whether the new product should be undertaken and give a recommendation

Problem b) Calculate the Modified Internal Rate of Return for the product launch