Investorama Limited s management team is considering replacing its existing production equipment with new equipment which should, in theory, reduce operating costs and improve quality, and increase sales volumes, over a five year period. That investment would cost Found 1, 150,000 at the start of the project. Currently, unit production costs, excluding depreciation, are Found 7.50. If the new equipment were purchased, this amount would decrease to Pound 5.92. Greater efficiencies will allow sales prices to be reduced from the current level of Pound 10 per unit to Pound 8.23. If the new equipment is purchased and used the company's existing cash fixed overheads for production of Pound 1m will increase by Pound 100,000 in each of the five years. The company's cost of capital is 12%. Sales and production forecasts for the five year period are: If purchased, the new equipment will have a residual value of Pound 148, 421 at the end of the five year period. The existing equipment currently has a scrap value of Pound 31, 500, for which it could be sold immediately. If it were not sold and continued to be used (instead of buying the new equipment) its scrap value would fall to Pound 20,000 at the end of year 5. Required i. Calculate the cash flows associated with each of: retaining and using the existing equipment, and separately purchasing and using the new equipment. ii. Calculate the Net Present Value (NPV) for i) retaining and using the existing equipment, and ii) purchasing and using the new equipment. B) Some organisations charge overheads into products and services using one organisation-wide overhead recovery (absorption) rate. Others use a rate for each cost centre. Required Explain the factors an organisation should consider in deciding which approach to adopt and apply. C) A number of research reports suggest that, despite it having perceived shortcomings when compared to the NPV (net present value) method, the ARR (accounting rate of return) method is popular with a number of management teams. Explain briefly why managers might prefer ARR to NPV when considering investment appraisal evaluations