ABC Co, a large stock-exchange-listed company, is evaluating an investment proposal to manufacture Product WWW, which has performed well in test marketing trials conducted recently by the companys research and development division. Product WWW will be manufactured using a fully-automated process which would significantly increase noise levels from ABC Cos factory. The following information relating to this investment proposal has now been prepared: PAGE 10 OF 13 Initial investment RM 2 million Selling price (current price terms) RM 20 per unit Expected selling price inflation 3% per year Variable operating costs (current price terms) RM 8 per unit Fixed operating costs (current price terms) RM 170,000 per year Expected operating cost inflation 4% per year The research and development division has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life-cycle of Product WWW. Year 1 2 3 4 Demand (units) 60,000 70,000 120,000 45,000 It is expected that all units of Product WWW produced will be sold, in line with the companys policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of Product WWW is planned to end. For investment appraisal purposes, ABC Co uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Ignore taxation.

Required: a) Calculate the following values for the investment proposal:

i) Net present value. [8 marks]

ii) Internal rate of return. [3 marks]

iii) Return on capital employed (accounting rate of return) based on average investment. [3 marks]

b) Briefly discuss your findings in each section of (a) above and advise whether the investment proposal is financially acceptable. [5 marks]

c) Discuss how the objectives of ABC Cos stakeholders may be in conflict if the project is undertaken.[6 mark}