Rainbow Co, a medium-sized company specializing in the manufacture and distribution of equipment for babies and small children, is evaluating a new capital expenditure project. In a joint venture with another separate company, it has invented a remote controlled pushchair, one of the first of its kind on the market. It has been unable to obtain a patent for the invention, but is sure that it will monopolize the market for the first three years. After this, it expects to be faced with stiff competition.

The details are set out below.

i.The project has an immediate cost of $2,100,000.

Sales are expected to be $1,550,000 per annum for years 1 to 3, falling to $650,000 per annum for the two years after that. No further sales of the product are expected after the end of this five-year period.

ii.Cost of sales is 40% of sales.

iii.Distribution costs represent 10% of sales.

iv.20% of net profits are payable to the joint venture partner the year after the profits are earned.

v.The company's cost of capital is 5%.

Required

(a) Calculate the net present value of the project at the company's required rate of return. Assume that all cash flows arise annually in arrears unless otherwise stated. Conclude whether the project is financially viable.

(b) Calculate the project's internal rate of return (IRR) to the nearest percent.

(c) Calculate the project's simple payback period. Assume all cash flows arise at the end of the year apart from the immediate investment costs.