Power Plc are considering buying a new machine in order to produce a product called 'STX'. The machine will cost USD 2.8 million and is expected to last 4 years at which time it will have a scrap value of USD 500,000. They expect to produce 120,000 units per year of STX which will be sold at USD 20 per unit. Production costs per unit (at current prices) are follows:

Material USD 8

Labour USD 7

Materials are expected to inflate at 8% per year and Labour is expected to inflate at 5% per year . Annual fixed overheads of the company are estimated to amount to

USD 1 million after the investment. The Management Accountant has determined that 10% of these are directly attributed to the investment in the new machine . Power Plc expects the selling price of the product to increase by 7% annually. An additional USD 200,000 of working capital will be required at the start of the project. The minimum expected rate of return by investors from the project is 11%. The Industry average cost of capital is 10% . The corporate tax is 30%.per year.

Required

a) Calculate the NPV of the project and advise as to whether or not it should be accepted ( Show all the workings )

b) Calculate the IRR of the project and advise as to whether or not it should be accepted ( Show all workings)

c) Explain the concept of time value of money in the context of finance.