Part C

PC Plastics Inc is considering a major investment project. The initial outlay of $1,200,000$ will, in subsequent years, be followed by positive cash flows, as shown below. $($These occur on the anniversary dates.$)$

Year $12345$

Cash flows $90,000190,000474,000215,0001,000,000$

After the end of the fifth year, this business activity will cease, and no more cash flows will be produced.

The initial $1,200,000$ investment in plant and machinery is to be depreciated over the five$-$year life of the project using the straight$-$line method. These assets will have no value after Year $5.$

The management judge that the cash inflows shown above are also an accurate estimation of the profit before depreciation for each of the years. They also believe that the appropriate discount rate to use for the firm$$s projects is $10$ per cent per annum.

The board of directors are used to evaluating project proposals on the basis of a payback rule which requires that all investments achieve payback in five years.

As the newly appointed executive responsible for project appraisal, you have been asked to assess this project using several different methods and advise the board if they should invest in the project. Do this in the following sequence:

i$.$ Calculate the payback period.

$(5$ marks$)$

ii$.$ Calculate an accounting rate of return

$(5$ marks$)$

iii. Calculate the net present value

$(5$ marks$)$

iv$.$ internal rate of return $($see appendix $1$ for IRR formula$)$

$($Hint: use a discount rate of $14\%)$

$(5$ marks$)$

v$.$ Explain the key differences between the discounted and non$-$discounted investment appraisal techniques.

$(10$ marks$)$