Argi-zone Ltd has recently completed a comprehensive $250,000, two-year market research project into the feasibility of their innovative new irrigation pump designed for use in the Murray Darling Irrigation basin. The pump was developed as part of the ongoing research and development at the company in which more than $500,000 was spent developing and testing the prototype. The pump is innovative because it draws large volumes of water but avoids killing large numbers of native fish through use of a patented filter system. It is planned that the pump will be manufactured in a purpose-built manufacturing facility.

The market research report found that 2,500 units of the patented irrigation pump could be sold annually over the next ten years at a price of $20,000 each, and installation cost will be $7,500 per pump. Fixed costs are estimated to be $20 million pa. The initial outlay will include $50 million to build production facilities and $5 million for land where the factory will be sited. The $50 million facility will be depreciated using the prime cost method over the projects 10-year life (fully depreciated at the end of the project). The land will not be depreciated and the price of the land is expected to remain unchanged. At the conclusion of the project the land and facilities will be sold for an estimated value of $10 million.

Assume all cash flows after initial outlay occur at the end of each year. The company tax rate is 30%. Their required payback is 3 years and required rate of return is 15%.

As a financial manager of the company, youre conducting a capital budgeting analysis of this project.

1. Calculate the incremental cash flows for each year (Y₀ to Y₁₀ inclusive). (20 marks)
2. Calculate the payback period of the project. (Show answer correct to two decimal places.) (3 marks)
3. Calculate the net present value, that is, the net benefit or net loss in present value terms of the project.

(Show answer correct to the nearer cent.) (5 marks)

1. Calculate the present value index of the project. (Show answer correct to four decimal places.) (2 marks)
2. Calculate the discounted payback period of the project. (Show answer correct to two decimal places) (4 marks)
3. Calculate the internal rate of return of the project using trial & error and interpolation method. (Show answer correct to four decimal places) (6 marks)
4. Evaluate under each criterion (that you calculated above) and overall if the company should accept this project or not. (Word limit 500 words) (10 marks)