A company is considering an investment of

Triangle PLC is a manufacturer of computer components and a decision is required on a proposal to invest $1,800,000 on a new machine in order to move into a new market for components. The financial details are as follows:

Initial Investment	$1,800,000
Life of project	10 years
Net cash flows:	Years 1–6	$500,000 per year
Years 7–10	$300,000 per year
Residual value	$500,000

• Calculate the payback period.
• Calculate the project’s net present value.
• Advise the company on whether it should proceed with the project and provide reasons for your advice.

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A company is considering an investment of $1.4 million in a project that has a seven-year life. The company has estimated its discount rate at 12%. Details of the sales and costs associated with the project are as follows:

Sales volume	250,000 units per year
Sales price	$4 per unit
Costs
Direct materials (4 kg at $.40 per kg)	$1.60 per unit
Direct labor (0.1 hours at $8 per hour)	$0.80 per unit
Overhead	$330,000 per year

Note: The annual overhead includes $200,000 per year depreciation on the asset. It also includes apportioned fixed overhead of a further $50,000 per year.

• Calculate the net present value of the project. Provide a commentary on the discounting process and on the net present value that you calculated.
• Carry out a sensitivity analysis on the five variables of this project. Include the life of the project and the discount rate. Identify what you consider the most critical variable and advise management what they should do, if anything, before adopting the new project.
• Advise the company on whether it should proceed with the project and provide reasons for your advice.

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