Shambles, a large toy retailer, are looking at bringing out a new range of soft toys. The range under consideration is "Mythical Beasts."  The "Mythical Beasts" range will cost £50,000 to setup and has running costs of £12,000 per year after that for five years.

The predicted return from this range is:

Assume a discount rate of 10%. Use Excel to set up a discounted cash flow analysis of the above information, calculating the net present value (NPV) for the investment. Remember that the initial expenditure takes place in 2011.

Your spreadsheet must be constructed in such a way that it can accommodate different values of the discount rate, and must be as efficient as possible. This means that formulae and fixed cell-referencing must be used where appropriate.  Also, the entire analysis must be contained in a single table.  Include a print-out of cell values as well as a print-out of cell formulae.

(i)  From the information in the spreadsheet only, decide whether or not this is a worthwhile investment, giving your reasons.

(ii) Explain the effect of discounting in this case upon future inflows, outflows and the NPV.

(b) Calculate the NPV for discount rates of 20%, 30%, 40% and 50%, giving your answers to two decimal places.

(c) Using Excel and the data generated from part (b), plot NPV against the discount rate in the range 10% to 50%.

(Your graph must be labelled clearly.)

(d) Use your graph to estimate the discount rate that would give a NPV of zero.  What is the significance of this discount rate? (Hint: What happens at discount rates lower and higher than this figure?)