Basics Limited is considering whether to invest $90,000 in the purchase of a new item of equipment. The equipment would be paid for with a down-payment of $60,000 and the payment of the remaining $30,000 six weeks later.The company has aready spent $8,000 on design and feasibility work and the operational management team are keen to purchase the equipment quickly.

The equipment is expected to have a life of three years ,after which time it should have a resale value of $5,000. The equipment will be depreciated by the staight-line method over three years. It has been estimated that an investment of $20,000 in working capital will be needed. As a result of acquiring the equipment, it is expected that there will be an increase in annual cash profits as follows:

Year

1 $37,000

2 $48,000

3 $26,000

Required;

(a) Calculate the expected NPV of the investment , if the cost of capital is 8%.

(b) Calculate the expected IRR of the investment , using the interpolation method taking 12% as the cost of the capital for calculating another NPV