21.2 Mellor & Ribchester Limited, a health drinks company, is considering whether or not to invest in a project to develop and sell a new range of fruit teas. Initial expenditure on a range of development expenses will be £150 000 at Time 0 to get the project up and running. Sales of the products will start in year 2, and it is anticipated that annual net cash inflows will be as follows:

£

Year 2 68 000 Year 3 71 000 Year 4 54000 Year 5 28 000 Year 6 10 000 Demand for the product is expected to decline after year 6 to the point where it will not be worth continuing production.

The £150 000 of initial expenditure is treated as a fixed asset, to be depreciated on a straight-line basis over 6 years, with an assumption of nil residual value at the end of 6 years.

i) Calculate ARR for the project.

ii) Calculate the payback period for the project.