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Silver plc has recently created a new product at a total development cost of 0.7 million. The business is now considering producing the product which
Silver plc has recently created a new product at a total development cost of 0.7 million. The business is now considering producing the product which will require an immediate outlay for new equipment of 7.5 million. Producing the new product will also require an immediate outlay for working capital of 2 million which will be released at the end of the production period. Production will last for five years. Estimates relating to production of the product are as follows: 1 Em 2 Em Year 3 Em 10 3 6 10 10 Sales Variable Costs Fixed Costs 4 Em 9 2.5 6 5 Em 8 2.5 6 3 6 3 6 The fixed costs include depreciation of 1.5 million a year for the new equipment. The equipment will have no residual at the end of the five years. The fixed costs also include an allocation of 0.5 million to represent a fair share of the general business overheads. These overheads will be incurred whether or not the new product is produced. Silver plc's cost of capital is 12%. Required: Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) for the above project explaining if the project should be undertaken or not
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