8 Investment Appraisal Techniques—Various. Sunnyvale Enterprises plc is involved in the production and distribution of milk products, natural and processed cheeses and dairy spreads. The company wishes to expand and develop its manufacturing processes and technology and its product range. Management estimates that the total capital investment in the project will be £1.7 million, which would be partly offset by the disposal of some existing facilities. The old facilities can be disposed of for an estimated £580,000.

As a result of the new investment, reduced operating costs, combined with increased sales revenue, are expected to increase net cash inflows by £190,000 in each year of the project, which is assumed to have an economic life of 10 years. Management would prefer the project to have a payback period of less than six years. An additional £30,000 will need to be invested in working capital (increased stock holdings, etc.). Ignore terminal or scrap values at the end of the project and any taxation effects. The company’s cost of capital is 10 per cent. Determine:

(a) The initial investment in the project.

(b) The payback period.

(c) The net present value (NPV) and the profitability index (PI).

(d) The internal rate of return (IRR) of the proposed investment.

(e) If the project should be implemented. Give reasons for your recommendation,

including a consideration of any non-financial or intangible factors which you think may be relevant.