Slater Co manufactures slate floor tiles and is considering a proposal to purchase a new piece of machinery that will clean and polish the tiles before they are packaged. This task currently requires an average of 12 minutes of labour at a cost of $5.60 per box of tiles. The machine will cost $152,000 and the operating costs of the machine are anticipated to be $18,000 per year, in the form of $1.80 variable operating costs per box of tiles. Slater Co expect to manufacture and sell 10,000 boxes of slate tiles per year. What is the payback period for this proposed capital investment?

Identify which of the following factors influence the required rate of interest (i.e., discount rate) in the net present value calculation:

I. the preference for having cash now

II. the inflation occurring

III. the risks associated with the expected cash flows

During the periods when inflation is expectedly higher, identify what will be the expected effect on the required rate of interest (i.e., discount rate) in the net present value calculation

Devril plc is considering investing in a project that has an initial cash outlay followed by a series of net cash inflows. The business applied the NPV and IRR methods to evaluate the project but, after the evaluation had been undertaken, it was found that the correct cost of capital figure (i.e., required rate of interest) was lower than that used in the evaluation.

Identify what would be the effect of correcting for this error on the NPV and IRR figures?