Muno plc is a Zimbabwean manufacturing company who are considering expansion into the UK. They have been looking at a possible factory site in the Midlands area in England.

Due to the unstable political situation in the UK, they expect to sell the factory they buy after 5 years.

The factory and machinery will be bought outright for 800,000. The factory building is worth 200,000 and machinery makes up the balance of the purchase price.

The factory building will not fall in value during the project and the full amount will be recovered on sale.

The machinery has a residual value of 27,000

The annual cash flows are as follows: -

Sales revenue 195,000, increasing by 8.5% each year

Running costs 8500, increasing by 6.5% each year.

Other expenses include 650 per month for variable overheads. This value will increase by 2% every year.

The company has a current cost of capital of 10%.

Calculate the payback period for the new machine.