8) Symphony plc is contemplating investment in an additional production line to produce its range of compact discs. A market research study, undertaken by a well-known firm of consultants, has revealed the scope to sell an additional output of 400,000 units p.a. The study cost 0.1 million, but the account has not yet been settled.

The price and cost structure of a typical disc (net of royalties) is as follows:

Price per unit		12.00
Costs per unit of output
Material cost per unit	1.50
Direct labour cost per unit	0.50
Variable overhead cost per unit	0.50
Fixed overhead cost per unit	1.50
		(4.00)
Profit		8.00

The fixed overhead represents an apportionment of central administrative and marketing costs. These are expected to rise in total by 500,000 p.a. as a result of undertaking this project. The production line is expected to operate for 5 years and require a total cash outlay of 11 million, including 0.5 million of materials stocks. The equipment will have a residual value of 2 million. Because the company is moving towards a Just-In-Time (JIT) management policy, it is expected that this project will involve steadily reducing working capital needs, expected to decline at about 3% per annum by volume. The production line will be accommodated in a presently empty building for which an offer of 2 million has recently been received from another company. If the building is retained, it is expected that property price inflation will increase its value to 3 million after 5 years.

While the precise rates of price and cost inflation are uncertain, economists in Symphony plcs corporate planning department make the following forecasts for the average annual rates of inflation relevant to the project:

Retail Price Index	6% per annum
Disc prices	5% per annum
Material prices	3% per annum
Direct labour wage rates	7% per annum
Variable overhead costs	7% per annum
Other overhead costs	5% per annum

Note: You may ignore taxes and capital allowances in this question.

Required:

Given that Symphony plcs shareholders require a real rate of return of 8.5% for projects of this degree of risk, assess the financial viability of this proposal.