GAVI plc is highly involved in research for diagnostic solutions in respect of the SARS-CoV-2 virus. It plans to purchase a new piece of equipment to supply a new product, Tedros. The equipment will cost 595,000 and is expected to have a useful life of four years. Scrap value at the end of its life will be 35,000.

GAVI plc expects that demand for Tedros will be:

Year	1	2	3	4
Demand (units)	70,000	90,000	110,000	50,000

The following information should be used in preparing your report:

1. The selling price for Tedros is expected to be 14.45 per unit. Variable costs are expected to be 8.35 per unit.
2. Incremental annual fixed production overheads of 29,500 per year will also be incurred.
3. The selling price and costs are expressed in todays price terms.
4. Expected increases in the selling price and production costs are as follows:

	Increase
Selling price of Tedros	4.75% per year
Variable costs	5.25% per year
Fixed overheads	6.35% per year

5. It should be noted that GAVI plc has a real cost of capital of 4.5% and pays tax at an annual rate of 30% one year in arrears.
6. Capital allowances on a 25% reducing balance basis are available. General inflation is expected to be approximately 7% each year.
7. GAVI plc has a target return on capital employed of 35%. Depreciation is charged on a straight-line basis over the life of the equipment.

a.Calculation of the Net Present Value of buying the new machine.

2. Calculate the Accounting Rate of Return stating clearly the metric used.

3. Calculate the Internal Rate of Return