A business has the opportunity to invest £12 million immediately in new plant and equipment in order to produce a new product. The product will sell at £80 per unit and it is estimated that 200,000 units of the product can be sold in each of the next four years. Variable costs are £56 a unit and additional fixed costs (excluding depreciation) are £1.0 million in total. The residual value of the plant and machinery at the end of the life of the product is estimated to be £1.6 million.

The business has a cost of capital of 12 per cent.

(a) Calculate the NPV of the investment proposal.

(b) Carry out separate sensitivity analysis to indicate by how much the following factors would have to change in order to produce an NPV of zero:

(i) Initial outlay on plant and machinery 

(ii) Discount rate 

(iii) Residual value of the plant and machinery.