Eurasian 1 _J.YJ. V uuu Ilul Diggers plc is considering the viability of a contract to supply tractors to a new customer for a 5 year period. The company accountant provides you with the following information. Immediate capital outlays: New machinery 1,800,000 Set-up costs 60,000 Scrap value of machinery in 5 years 200,000 During each year of the contract it is expected that 25 tractors will be supplied. Each will need 15,000 of parts and 3,000 of other variable costs including labour. Assume that unit variable costs will be the same each year. Fixed costs of the company will not change but the project will be apportioned these costs at a rate of 1,000 per tractor. The company is currently operating close to capacity and if the contract is accepted, cash income from other operations will be reduced by 12,000 per annum in years 1 to 4 and by 60,000 in year 5. Other than immediate cash ows, all cash ows arise at the end of the year to which they relate. REQUIRED: (a) If the company's cost of capital is 10% and the price per tractor is 40,000: (i) calculate the NPV of the project. (ii) calculate the 'breakeven price' per tractor (that at which the N PV = 0). (b) Would you recommend acceptance of the contract? Why? (0) Explain your treatment of the fixed costs and of the reduction in income from other operations. (d) Assuming that the price per traetor is 40,000, estimate the IRR of the project for Diggers plc using linear interpolation. (e) What factors other than the NPV or IR of the contract might be considered in making the decision