Fin222 Ltd is considering replacing an existing productionn line with a new line that has a greater output capacity and operates with less labour than the existing line.

Existing Production Line

The old line was constructed 5 years ago for 200,000. It had an expected useful life of 10 years and an estimated market value of zero at the end of its life.

If you sell the old line now, it is expected to be sold for 80,000

New Production Line

You have just completed a $30,000 fesibility study for a new production line.

The New line would cost $80,000, has a 5-year and is expected to be sold for $100,000 at the end of its life.

Because the new line is more automated, it would require fewer operations, resulting in a saving of operating expense of $40,000 per year.

The new line however expected to have a negative impact on other side of the business and an annual operating cost of his side effect is expected to be $20,000 per year.

Additional sales with the new machine are expected to result in additional net cash inflows of $150,000 per year.

If Fin222 Ltd invests in a new line, a one-time investment of $10,000 in additionally working capital will be required. This investment will be recovered in the terminal year.

Finn222 Ltd's prediction lines are depreciated using the straight line method. The tax rate is 30% and the opportunity of capital is 10%

A) calculate free cash Flows from Year 0 to Year 5 (10 marks)

B) Calculate the standard payback period. If the cut-off year is 3 years, should Fin222 Ltd accept the new project and why? (3 marks)

C) Calculate the NPV, Should FIN222 accept the new project and why? (3 marks)

D) Establish the equation from which the IRR is solved. Assuming the IRR =6.67%, Should FIN222 Ltd accept the project and why? (3 marks)

E) Under what condition will the Internal Rate of Return (IRR) rule and Net Present Value (NPV) rule give the different accept/ reject decision with conflict? (2 marks)