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Olourun Ltd is the major employer in the Front Hill area, where the firm is located. The company is considering the acquisition of a new production line. The equipment would cost $$720000$ and installation cost would amount to $$59000.$ At the end of its $5-$year life, it is expected to be disposed of at its salvage value of $$70000.$ The new equipment would allow the company to expand production significantly, which would require an increase in working capital of $$90000.$ If the purchase is made, the firm's maintenance costs would be reduced by $$60000$ annually. However, at the end of the third year, a major overhaul would have to be undertaken at a cost of $$80000.$ Operating cash flows would be $$220000$ in the first year; this would increase by $2\%$ for each of the following years.

The company's cost of capital is $14\%$ and the relevant corporate tax rate is $25\%$

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a$)$ Calculate the relevant after$-$tax net cash flows and after$-$tax profits over the life of the investment.

b$)$ Compute the project's ARR

c$)$ What is the payback period?

d$)$ Using the NPV as the basis of your decision, advise Olourun as to whether the company should purchase the equipment.

e$)$ Would you advise the company to base their decision on the payback method rather than the NPV as used above?

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