● Accelerating wage inflation in the country where factory C is located would probably reduce net cash inflows by the following amounts:

Year 2: £2 million;

Year 3: £3 million;

Year 4: £4 million;

Year 5: £6 million.

It is assumed that net cash flows arise at the end of the relevant year and that factory A can be completed in time for commencement of operations at the beginning of year 1.

Required:

(a) Calculate the NPV for each of the factories under consideration.

(b) Calculate the payback period for each of the factories under consideration.

(c) Advise the managing director as to which factory should be purchased, paying particular attention to the risk involved in each option.