Part A

Q1. Michael plc is considering buying some equipment to produce a chemical named X14. The new equipment's capital cost is estimated at $100 million. If its purchase is approved now, the equipment can b bought and production can commence by the end of this year, $50 million has already been spent research and development work. Estimates of revenues and costs arising from the operation of the new equipment are:

	Year 1	Year 2	Year 3	Year 4	Year 5
Sales price ($/litre)	100	120	120	100	80
Sales volume (million litres)	0.8	1.0	1.2	1.0	0.8
Variable cost ($/litre)	50	50	40	30	40
Fixed cost ($m)	30	30	30	30	30

If the equipment is bought, sales of some existing products will be lost resulting in a loss of contribution of $15 million a year, over the life of the equipment. The accountant has informed you that the fixed cost includes depreciation of $20 million a year the new equipment. It also includes an allocation of $10 million or fixed over-heads. A separate study has indicated that if the new equipment were additional overheads, excluding depreciation, arising from producing that the chemical would be $8 million a year. Production would require additional working capital of $30 million. For the purposes of your initial calculations ignore taxation. Required: (a) Deduce the relevant annual cash flows associated with buying the equipment. (b) Deduce the payback period. (c) Calculate the net present value using a discount rate of 8 per cent. (d) Explain (1) what is net present value investment appraisal method, (2) payback accounting rate of return and (3) internal rate of return