5* Company Y is considering whether to introduce a new product, the XYZ. The sales price is expected to be 425 per XYZ in real terms, and production costs will be 350 in real terms indefinitely. The product line will be capable of producing 150,000 XYZs per year for 10 years. The equipment required for production will cost 45m and will have zero scrap value at the end of the 10 years. The real cost of capital for the project and expected inflation rate are constant at 8% and 4% respectively. The corporate tax rate is 30% and capital allowances on the equipment are straight line over 5 years with the first capital allowance taken in year 0. Assume the company has sufficient taxable income to obtain full benefit from all capital allowances. Calculate: (i) the NPV of the product line when it is operating at full capacity. (ii) the minimum level of output per year required to make the project worthwhile. Explain whether the NPV calculated in (i) would increase or decrease if the project's real cost of capital were (a) 5%, (b) 10%. [You do not need to do any calculations] 5* Company Y is considering whether to introduce a new product, the XYZ. The sales price is expected to be 425 per XYZ in real terms, and production costs will be 350 in real terms indefinitely. The product line will be capable of producing 150,000 XYZs per year for 10 years. The equipment required for production will cost 45m and will have zero scrap value at the end of the 10 years. The real cost of capital for the project and expected inflation rate are constant at 8% and 4% respectively. The corporate tax rate is 30% and capital allowances on the equipment are straight line over 5 years with the first capital allowance taken in year 0. Assume the company has sufficient taxable income to obtain full benefit from all capital allowances. Calculate: (i) the NPV of the product line when it is operating at full capacity. (ii) the minimum level of output per year required to make the project worthwhile. Explain whether the NPV calculated in (i) would increase or decrease if the project's real cost of capital were (a) 5%, (b) 10%. [You do not need to do any calculations]