16) Treeco Ltd. has just developed a new product to be called Freddo and is now considering whether to put it into production. Costs incurred in the development of Freddo were 600,000. Production of Freddo would require the purchase of new machinery at a cost of 2,500,000 (payable immediately). The machinery would have a useful life of 4 years, at the end of which its salvage value would be zero. Production costs per unit of Freddo (at year 1 prices) would be as follows: Variable materials 22 Variable labour 46 Variable overheads 21 In addition, fixed production costs (at year 1 prices), including straight line depreciation on plant and machinery would be 1,200,000. The selling price of Freddo will be 130 per unit (at year 1 prices) and sales are expected to be 35,000 units in each of the next 4 years. The retail price index is expected to rise at a rate of 3% per year for the next 4 years and the selling price of Freddo is expected to rise at the same rate. Annual inflation rates for production costs are expected to be as follows: Variable materials 4% Variable labour 5% Variable overheads 3% Fixed costs 4% The company's weighted average cost of capital (in nominal terms) is expected to be 12%. REQUIRED, ANSWER ALL PARTS (making any necessary assumptions and showing all workings): Note: You may ignore taxation and also assume that all costs and revenues rise at the end of each year. a. Based on the above information, perform relevant calculations to determine the net present value of the Freddo project and offer your advice on whether or not Treeco should go ahead with the production of Freddo. (30 marks)