During 2017, the management of Brogan plc identified a project that that will enable a new product to be sold and you have been asked to evaluate the new investment.

New plant and equipment will be purchased by the end of 2017 and this will cost 450 000. The new plant and equipment will be depreciated for tax purposes, using the straight-line method over a period of three years, which is the expected life of the machine. After three years, it is expected that the machine will have no scrap value.

As a result of this new product being manufactured and sold, the companys working capital will increase by 20 000 at the end of 2017 and will increase to 35 000 in 2018 and remain at this level until the production ceases.

The new product will sell for 40 per unit and the variable cost is expected to be 25 per cent of the selling price. The fixed costs, excluding the depreciation charge will be 60 000 and this will increase by 10 per cent each year.

The sales of the new product are expected to be

2018 12 000 units

2019 20 000 units

2020 20 000 units

Tax is payable at 30 per cent and will be paid in the year after the profit is generated,

The required rate of return is 10 per cent

Required:

1. What will be the effect on the companys profit if the new machinery and equipment is purchased?

2. Using the Discounted Cash Flow approach, determine if the company should invest in the new plant?

(c) What the other methods are available to evaluate investment projects and discuss the issues that must be considered if these methods are used to make an investment decision.