A company is evaluating the expansion of its production capacity by acquiring

new equipment. The initial cost of the equipment is R100 million and the

companys working capital would increase by R10 million upon the acquisition of

the new equipment. The working capital will be recovered at the end of the

equipments useful life. The new equipment is estimated to have a useful life of

four years, at the end of which it will be sold for R15 million.

Management expects company sales to increase by R120 million in the first year,

R160 million in the second year, R140 million in the third year, and then to trail

off to R50 million by the fourth year as the equipment becomes old and less

efficient. Operating expenses are expected to be 60% of sales. Depreciation is

based on a straight-line method over the equipments life.

The companys cost of capital is 15% and the corporate tax rate is 28%.

Required:

1 Determine the relevant cash flows associated with the decision to invest

in the new equipment and show the following - payback period on new equipment,the NPV,IRR,

Should the company invest in the new equipment? Why or why not?