Macy's Ltd. developed a new product to be called AD and is now considering whether to put it into production.

Costs incurred in the development of AD were 350,000.

Production of AD would require the purchase of new machinery at a cost of 2,500,000 (payable immediately). The machinery would have a useful life of 4 years, at the end of which its salvage value would be 0.

Production costs per unit of AD (at year 1 prices) would be as follows:

Variable materials 40

Variable labour 82

Variable overheads 21

In addition, fixed production costs (at year 1 prices), including straight line depreciation on plant and machinery would be 1,000,000.

The selling price of AD will be 150 per unit (at year 1 prices) and sales are expected to be 35,000 units in each of the next 4 years.

The retail price index is expected to rise at a rate of 5% per year for the next 4 years and the selling price of AD is expected to rise at a rate of 1% per year. Annual inflation rates for production costs are expected to be as follows:

Variable materials 6%

Variable labour 4%

Variable overheads 3%

Fixed costs 3.1%

The companys weighted average cost of capital (in nominal terms) is expected to be 10%.

Based on the above information, perform relevant calculations to determine the net present value of the AD project and offer your advice on whether or not Macy's should go ahead with the production of AD.

Ps: Answer all the questions (specific steps) and make the necessary assumptions (ignore the effect of taxes and assume that all costs and revenues go up at the end of each year).