Question 6

The Happy Family Cereal plc is a successful cereal bars manufacturer. Since it was established five years ago it has gradually increased its range of chocolate and fruit cereal bars. The sales director has now come to the board with a proposal to expand the range further into chocolate cereal bars. This will involve the purchase of new machinery; the initial outlay will be 235,000. The finance director and the sales director meet to discuss sales projections for the new range of chocolate biscuits. They forecast the following net cash inflows over the five years until the machinery will need to be replaced:

Year 1	45,000
Year 2	57,000
Year 3	62,000
Year 4	75,000
Year 5	75,000

In addition to these inflows, it is expected that the machinery will be sold for scrap at the end of year five for 20 000.

Calculate the payback period for the project. (5 marks)

Calculate the accounting rate of return (ARR) for the project. (5 marks)

Calculate the net present value (NPV) for the project. When the discount rate is 10%. (5 marks)

Discuss the results and their potential impact on the company. (5 marks)