Smart Sports is also planning to launch a range of drinks products. The products have been developed by Hydration Labs Ltd and are designed to be sold as powders that dissolve easily in water. They are based on natural fruit extracts with added vitamin and mineral supplements. Smart Sports have been offered the opportunity to buy the rights to package and sell the drinks under the Smart brand name for a four year period, for the sum of £250,000. Some market research has been undertaken, and the likely cash flows associated with the project have been forecast as shown in Table 15.11.

* The work on designing the packaging and the advertising campaign will largely be done by the two members of the marketing department at Smart Sports Ltd, both of whom have time available to complete the design. Of the costs, £4,000 will be spent on radio advertisements for the new drinks. Smart Sports Ltd would usually require a return of between 10% and 15% on projects undertaken, depending on the risk of each project.
Assess this business project for Smart Sports Ltd by calculating its payback period, its net present value, and its internal rate of return. Advise Sam on whether the business should consider going ahead with this project.

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Table 15.11 Time Already paid At start At start Sports drinks Market research and forecasting costs Cost of licence to market drinks Costs of designing the packaging plus cost '000 10 250 15 of advertising campaign* After one year Cash inflow from drink sales 40 After two years Cash inflow from drink sales 70 After three years Cash inflow from drink sales 140 After four years Cash inflow from drink sales 120