Reference no: EM132575439

MG is considering investing in new machinery. This investment will require an initial investment of $2,000,000. This new machinery is expected to have an economic life of 5 years with a residual value of $20,000 at the end of 5 years.

The estimated revenues for this investment are as follows:

Year           1            2           3          4               5

$000        600          850         950      900            750

Additional information:

(a) Additional installation costs of $300,000 would be required before the start of the project.

(b) Maintenance costs of $30,000 per year are expected for years 1 to 5.

(c) 3 years is the expected payback period.

(d) The cost of capital is 10% per annum.

Discount factors are as follows:

Year              5%          10%                    20%

1                0.952       0.909               0.833

2                 0.907      0.826              0.694

3                   0.864      0.751              0.579

4                   0.823        0.683            0.482

5                 0.784         0.621              0.402

Required

Question (a) Calculate the following for the investment in new machinery:

(i) Net present value

(ii) Internal rate of return

(iii) Payback period

Question (b) Evaluate the investment using all three appraisal techniques in part (a) and recommend whether the investment is worthwhile.