A company is considering a new project to add to its existing operations. Land costs 150,000 and buildings will cost 200,000 to renovate while new plant and equipment will need to be purchased for 250,000.

Expected future cash flows from the project are:

Year 1 2 3 4 5 6 CF 80000 120000 120000 150000 180000 200000

While the equipment will be depreciated over the life of the new project and will have resale value of 50,000, it is expected that the business can be sold as an on-going operation for 250,000. Firms listed on the stock market, with similar structure and operations to the new project, have an average beta of 2. Yesterdays 90-day treasury bill rate was 49.6 bp per quarter and the expected return on the stock market is currently 7% p.a.

Calculate:

Payback. (4.72 years)

ARR using average investment. (25.5% p.a.)

NPV. (+77,924)

IRR. (15.4% p.a.)

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