6. Stanton Industries Ltd. is considering an investment in a new product line. Current production utilizes only 75% of the manufacturing facility, so there is sufficient room in the existing building to manufacture the new product. The original cost of the manufacturing facility was $800,000, and it is being amortized over 20 years on a straight line basis.

If the new product is produced, Stanton will have to invest $16,000 in new equipment and $4,500 in working capital. Stanton anticipates that net cash inflows of $3,600 will be received from the sale of the new product for a twelve year period. At the end of the twelve years, the working capital will be recovered, and the equipment is expected to have a salvage value of $2,000. Stanton requires a 14% rate of return on its investments.

Required: (total marks = 14)

a) Using the net present value method of discounted cash flow analysis, determine whether Stanton should invest in this new product line.

b) Describe two things, in addition to the number you just calculated, that should be taken into consideration by Stanton when making this investment decision. Make sure you make it clear why these are important to consider.

c) Determine the payback period for this investment. Under what circumstance would this project be accepted using the payback period as the decision tool? Describe two limitations to the payback period method.