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

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. 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 3m which will be released at the end of the production period. Barns Limiteds cost of capital is 10%. Required: a) 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. b) Compare and contrast NPV and IRR as investment appraisal methods, include in your comparison which method you consider to be the best one to use for investment appraisal.