A manufacturer of fine whisky currently spends $120,000 per year to send production by-products to landfill. The firm is evaluating an opportunity to acquire a new machine which will enable it to reduce the amount of by-products which go to landfill by 70%. The new machine will take production by-products and turn them into stock pellets for local farmers. It is estimated that the total revenue generated from sales of stock pellets will be $117,000 in the first year of the machine's operation. These revenues from stock pellet sales will grow by 2% p.a.

Other key details regarding the project include:

• The purchase price of the machine is $879,000. It will also cost $56,000 to install the machine and train staff in its use.
• The machine will have a useful life of six years.
• The machine will cost $45,000 to operate in year 1. These costs will grow by 1.5% p.a.
• At the end of the third year of operations, the new machine is expected to require a one-off major overhaul costing $28,000.
• The firm's tax rate is 30%.

The firm's tax rate is 30%. The firm requires a 15% required rate of return on all potential investments. All calculations must be performed in Excel.

Required

In relation to the above proposal:

1. Calculate the annual after tax cash flows (5 marks) and annual after tax profit (5 marks).
2. Calculate the payback period (2 marks).
3. Calculate the net present value (2 marks).
4. Calculate the internal rate of return (2 marks).
5. Calculate the accounting rate of return based on the average and initial investment (2 marks).
6. Based on an assessment of the above, strategic factors and sustainability factors, discuss whether the firm should go ahead with the proposal (7 marks).
7. Discuss how sensitive your recommendations are to changes in assumptions in regards to the financial impact of the new capital investment. In your discussion, include examples which illustrate how changes to at least two assumptions impact the financial analysis (5 marks).

Ensure that your answers for the above are discussed and supported by relevant calculations/workings.