Self-test Helico Ltd received a contract for providing helicopter emergency services for the next 6 years in London.

Before deciding on accepting the contract they undertook an evaluation of the project. The following information is available:

The initial cost of purchasing a helicopter will be £950,000. Depreciation, using the straight line method, is calculated over the contract period on the basis that at the end of the period the scrap value of the helicopter will be £50,000.

Monthly expenses, including depreciation, for the first two years are anticipated to be £315,000. This will increase in year 3 by £40,000 per year and in year 6 by an additional £26,000 per year.

The emergency services are expected to operate for 300 days per year. Each emergency will be paid £690. As the service becomes better known, more people will be making use of the service, and it is expected that by year 3 the service will be operating for 320 days a year and also be used twice per day.

In year 4 the amount payable for the service will be increased by 20 per cent and this price will remain fixed until the end of the contract.

Helico Ltd considers that the project would only be worthwhile if it could have a payback period of four years on the project.

Funding for the project would be by way of a loan bearing interest at 15 per cent p.a.

You are required to calculate, in years and days, the payback period, the net present value and the average rate of return.

Give your recommendations to the company using the information you have calculated (assume that it is company policy only to invest in projects achieving an average return of 10 per cent per year).

The following is an extract of the present value table for £ at 15 per cent:

Year 1 0.870 Year 2 0.756 Year 3 0.658 Year 4 0.572 Year 5 0.497 Year 6 0.432