Fresh Juice Ltd manufactures a new fruity drink called 'Heavenly' which can be sold for $5.00 per bottle. Variable costs of production are currently $3.50 per bottle and fixed costs are absorbed on a unit basis of $1.20 per bottle. A new high-tech machine could be bought-in to improve its production costs. The machine will cost $300,000 now, but it can result in a significant reduction of 40% in the variable production cost per unit. Since the reduction in variable production costs are not sufficient to meet the company's profit target, the management has decided to increase the unit selling price by 4%. Fixed operating costs incurred would increase by $30,000 in the first year as a direct consequence of buying the new high-tech machine and there-after to increase by 10% each year. The machine has an expected operational life of 5 years and its scrap value by then will be $20,000. Sales volume of the Heavenly' drink is estimated to be 40,000 bottles per annum in year 1 and is expected to increase by 10% each year there-after. The expected payback period is 3.5 years. Year: 1 2 3 4 5 Discount Factor @ 10% 0.909 0.826 0.751 0.683 0.621 Discount Factor @ 20% 0.833 0.694 0.579 0.482 0.402 Required: Evaluate the above proposal and give your recommendation on whether to accept or reject the investment in the new high-tech machine based on the following methods: a) Non-discounted payback period. Show all workings for net cash flows. (9 marks) b) Discounted payback period and Net Present Value (NPV) at cost of capital of 10%. (6 marks) c) Internal rate of return (IRR). (5 marks) Fresh Juice Ltd manufactures a new fruity drink called 'Heavenly' which can be sold for $5.00 per bottle. Variable costs of production are currently $3.50 per bottle and fixed costs are absorbed on a unit basis of $1.20 per bottle. A new high-tech machine could be bought-in to improve its production costs. The machine will cost $300,000 now, but it can result in a significant reduction of 40% in the variable production cost per unit. Since the reduction in variable production costs are not sufficient to meet the company's profit target, the management has decided to increase the unit selling price by 4%. Fixed operating costs incurred would increase by $30,000 in the first year as a direct consequence of buying the new high-tech machine and there-after to increase by 10% each year. The machine has an expected operational life of 5 years and its scrap value by then will be $20,000. Sales volume of the Heavenly' drink is estimated to be 40,000 bottles per annum in year 1 and is expected to increase by 10% each year there-after. The expected payback period is 3.5 years. Year: 1 2 3 4 5 Discount Factor @ 10% 0.909 0.826 0.751 0.683 0.621 Discount Factor @ 20% 0.833 0.694 0.579 0.482 0.402 Required: Evaluate the above proposal and give your recommendation on whether to accept or reject the investment in the new high-tech machine based on the following methods: a) Non-discounted payback period. Show all workings for net cash flows. (9 marks) b) Discounted payback period and Net Present Value (NPV) at cost of capital of 10%. (6 marks) c) Internal rate of return (IRR)