Question 1 Part A Weaving Mills plc is considering expanding its production of a new yarn, code name Alphal. The plant is expected to cost 1.6 million and have a life of 5 years and a zero residual value. It will be bought, paid for and ready for operation on 31 December Year 2018. 0.4 million has already been spent on development costs of the product, and this has been charged in the income statement in the year it was incurred. The following results are projected for the new yarn in the following five years Year 1 Year 2 Year 3 Year 4 Year 5 Sales revenue Costs, including depreciation Profit before tax 2.8 (2.2 0.6 2.4 2.8 2.2 0.6 2.8 (2.2 0.6 2.8 (2.0 2.2 Tax is charged at 40 per cent on annual profits (before tax and after depreciation) and paid one year in arrears. Depreciation of the plant has been calculated on a straight-line basis. Additional working capital of 1.6 million will be required at the beginning of the project and released at the end of year 5. You should assume that all cash flows occur at the end of the year in which they arise You are required to: (10 marks) () Prepare a statement showing the incremental cash flows of the project relevant to a decision concerning whether or not to proceed with the construction of the new plant (3 marks) (i) Compute the net present value of the project using a 10 per cent discount rate, and discuss the merits and demerits of using NPV as an investment evaluation criteria (3 marks) (i) Compute the payback period to the nearest year. Explain the meaning of this term