45 Fine Chemicals plc has recently received an invitation to produce a new chemical for supply to a textile manufacturer. The invitation is to moduce 15,000 kg each year for the nestthree yearsat apriceof42 akg. The following information has been collected which will help the directors to reach a decision on whether to accept the invitation or not: 1 New plant costing 200,020 will need to be bought and paid for at the start of production. This will have a residual value of 10,0:[It0I at the end of the third year. Ifthe plant is acquired, the business will follow its normal practice of depreciating it on a straight-line basis in the annual nancial accounts. Ten new workers will be taken on for the duration of production. Recruitment costs, payable at the start of the production period will total 20,111]. The workers will be paid compensation for being made redundant at the rate of 3,1] per worker, payable at the end of the production period. During the production period the workers will be paid 200,000 in total each year. Production of the new chemical will be charged with a share of the business's overheads totalling 55,000 in each of the three years. It is estimated that the production ofthe new chemical will give rise to an increase of13,0m in overheads. Production will require the use ofan ingredient, known as 3156, at the rate ofdm kg each year. The business already has inventories of 4900 kg. This was originally bought for 15 perkg. This was bought for a previous contract that had to be abandoned. Ifthe inventories of 315G are not used in production of the new chemical there is no other use for it and it will be disposed of immediately. It will cost 2 per kg to dispose of the KISS. Thecost ofnew K15G is 20 perkg. Production will also require the use of PM kg each year of another ingredient, known as 'r'2SD. The business aheady has l31,000 kg in inventories, which cost 25 per kg. Recently the buying price has dropped to 20 per kg. The business could se0 its inventories of Y23D for 15 per kg. Y23D is used in large quanties on a number of the business's current products. Assessing the investment in the plant is to be undertaken on the basis of a finance cost hr 151'? .H-HIAI-II. inux-rt