INVESTMENT APPRAISAL

On 1 January 2019, Della Ltd is considering investing in a new equipment that would cost $539,000, payable immediately. The equipment will be used to produce a new product, and Della Ltd expects to use the equipment for the next 4 years. At the end of the 4 years, the equipment will have a residual value of $110,000.

The expected net cash flows from the new product produced using this equipment are as follows:

	2019	2020	2021	2022
Expected net cash flows	$150,000	$190,000	$120,000	$100,000

Della Ltd calculates depreciation on a straight-line basis. The companys cost of capital (i.e. required rate of return) is 3%.

The present values of $1 (i.e. discount factors) are:

Interest (discount) rate	Periods
	1	2	3	4
3%	0.9709	0.9426	0.9151	0.8885

IMPORTANT:

- In answering the questions below, please dont include the dollar sign ($) or any thousands separator - i.e. $12,000 should be written as 12000.

- For ARR, make sure you express it as a percentage with 2 decimal places (e.g. 14.55) - please don't include the % (percentage) sign.

- When calculating the NPV, please use the discount factors provided in the question.

- If any of the net profits/losses or the NPV is negative, please include the (minus) sign in front of the amount and dont put it in parentheses.

REQUIRED: (a) Calculate the annual net profit/loss expected to be generated by this project after the initial investment. (2 marks) Net profit/loss 2019: $ Net profit/loss 2020:$ Net profit/loss 2021: $ Net profit/loss 2022: $ (b) Calculate the annual rate of return (ARR). Calculate each component of ARR. (1.5 marks) Average net profit/loss = $ Average investment = $ ARR = % (c) Assuming that cash from sales and for the costs of production for each year are received and paid, respectively, at the end of each year in which they arise, calculate the net present value (NPV) of this project. (2.5 marks) NPV = $