(b) Barns Limited has recently created a new product at a total

development cost of 0.7m. The business is now considering producing

the product which will require an immediate outlay for new equipment

of 6m. Production will last for four years. Estimates relating to

production of the product are:

Year

1 2 3 4

m m m m

Revenue 10 10 9 5

Costs 6.6 6.6 6.6 6.1

The costs shown above include depreciation of 1.5m a year for the new

equipment. This equipment will have no residual at the end of the four

years. The costs shown above do not include any allocation for a fair

share of the general business overheads, the company intends to

allocate 0.6m per year to the project. These overheads will be incurred

whether or not the new product is produced.

(b) Barns Limited has recently created a new product at a total development cost of 0.7m. The business is now considering producing the product which will require an immediate outlay for new equipment of E6m. Production will last for four years. Estimates relating to production of the product are: Revenue 10 Costs 6.6 6.6 6.6 The costs shown above include depreciation of 1.5m a year for the new equipment. This equipment will have no residual at the end of the four years. The costs shown above do not include any allocation for a fair share of the general business overheads, the company intends to allocate 0.6m per year to the project. These overheads will be incurred whether or not the new product is produced. See Next Page 4QOMN502 If Barns Limited produces the new product sales of an existing similar product will decline resulting in a loss of contribution of 0.4m per year for each of the four years. Producing the new product will require an immediate outlay for working capital of E3m which will be released at the end of the production period. Barns Limited's cost of capital is 10%. Required: Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) for the above project stating if the project should be undertaken or not. (14 marks)