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Poncho Ltd manufactures a single product, the Arcanti, an intricate silver tiara. The managing director, Pedro is considering the addition of a glaze to the
Poncho Ltd manufactures a single product, the Arcanti, an intricate silver tiara. The managing director, Pedro is considering the addition of a glaze to the Arcanti which would provide a 'sparkling' element to the tiara. Such designs are already available in the market and are proving to be quite popular. The production manager has proposed to buy special equipment needed to add the extra 'sparkle' to the Arcanti. The equipment will cost 100,000 and will have a useful life of four years. The cash inflows of this project are expected to be: Year 1 2 3 4 AWN 27,000 30,000 41,000 34,000 The equipment will be depreciated on a straight-line basis over 4 years, with a scrap value of 14,000 at the end of year 4. Poncho Ltd's cost of capital is 10% and the company's maximum required payback period is three years. The following information may be of assistance when appraising this project from a financial viewpoint: Periods 1 2 Discount factors 5% 10% 15% 0.9524 0.9091 0.8696 0.9070 0.8264 0.7561 0.8638 0.7513 0.6575 0.8227 0.6830 0.5718 0.7835 0.6209 0.4972 3 4 5 Required: 1 a) Calculate the net present value of the proposed project. Show calculations and your answer to the nearest . (10 marks) b) Calculate the payback period of the proposed project in years and months. Partial months must be rounded to the nearest whole month. (6 marks) c) Calculate the accounting rate of return of the proposed project. (Your workings should be to two decimal places) (5 marks) d) Explain what the calculations in parts (a) and (b) tell you about the viability of this project for Poncho Ltd. (4 marks)
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