The accountant has informed you that the fixed costs include depreciation of £20,000 a year on the new equipment. They also include an allocation of £10,000 for fixed overheads.

A separate study has indicated that if the new equipment were bought, additional overheads, excluding depreciation, arising from producing the chemical would be £8,000 a year. Production would require additional working capital of £30,000.

For the purposes of your initial calculations ignore taxation.

Required:

(a) Deduce the relevant annual cash flows associated with buying the equipment.

(b) Deduce the payback period.

(c) Calculate the net present value using a discount rate of 8 per cent.

(Hint: You should deal with the investment in working capital by treating it as a cash outflow at the start of the project and an inflow at the end.)