OlourunLtdis the major employer in the FrontHill area, where the firm is located. The companyis considering the acquisition of a new production line. The equipment would cost$720 000 and installation cost would amount to $59 000. At the end of its 5-year life, it is expected to be disposed of at its salvage value of $70 000.The new equipment would allow the company to expand production significantly, which would require an increase in working capital of $90 000. If the purchase is made, the firm's maintenance costs would be reduced by $60 000annually.However, at the end of the third year, a major overhaul would have to be undertaken at a cost of $80 000.Operating cash flowswouldbe$220000in the first year; this would increase by 2%foreachof the following years.

The company's cost of capital is 14%and the relevant corporate tax rate is 25%

a)Calculate the relevantafter-taxnet cash flowsand after-tax profitsover the life of the investment.[10 marks]

b)Compute the project's ARR[5 marks]

c)What is the payback period?[5 marks]

d)Using the NPV as the basis of your decision, adviseOlourunas to whether the company should purchase the equipment.[7 marks]

e)Would you advise the company to base their decision on the payback method rather than the NPV as used above?[5 marks]

f)Compute the IRR of the project[12 marks]

g)The company is considering another investmentwhichwould have an initial cost of$800 000 and an NPV of $65000.There is a situation of capital rationing, and you have suggested that the firm should use the profitability index to choose which investment to implement. Advise the company.[7 marks]

h)Discuss THREE non-financial factors which the firm should consider when making this decision.[9 marks]

i)Why is it important for the company to know its cost of capital when making investment decisions?[5 marks]