Papamoa Ltd is considering the introduction of a new product- Aerodynamic Surfboards that has evolved from work undertaken by the companys R&D department. The manufacture of the product will require investment of $ 5.0 million in a new plant and machinery. It will also require the use of an equipment already owned by the company, which has been fully depreciated for tax purposes but could be sold today for $ 0.6 million. If used, this equipment will have no resale value at the end of the project. The company anticipates it could manufacture and sell 20,000 units of Aerodynamic Surfboards per annum and the companys market research has found that there is a market for this level of sales at a price of $250 per unit. The variable costs of production would be $120 per unit and the fixed costs of production and marketing are estimated to be $250,000 per annum. The expenditure on plant and machinery can be depreciated for tax purposes on a straight-line basis over the anticipated product life of eight (8) years. At the end of the eight (8) years, the machine can be sold for $0.45 million. The project would require holding stocks of raw materials and components worth $120,000 at the start of the project.

1. If the tax rate is 30 per cent and the after-tax required rate of return is 14 per cent, calculate the projects:
   1. Payback period
   2. Discounted payback period
   3. IRR
   4. NPV
   5. Profitability Index

(15 marks)

2. Is this a profitable investment? State and explain all the critical assumptions

(Word limit 100)

(3 marks)

3. Compute the NPV of the project if the
   1. Selling price increases by 10%
   2. Variable cost increases by 10%

(4 marks)

4. Which of the factors in (c) above is most sensitive to the project? Why?

(Word limit 100)

(3 marks)