Tallon ple is a manufacturing company which has developed a range of very successful products in the past. It has recently developed a new product which it hopes will be well received by the market. Prior to introducing the new product Tallon ple carried out extensive market research at a cost of 200,000. This research indicates that the product is expected to have a life of four years and target sales volumes and selling prices are predicted as follows: Year Units Unit Selling Price 1 500,000 10 2 600,000 11 3 600,000 12 4 400,000 10 As a financial analyst in Tallon ple you have been asked to evaluate the viability of the new product and to recommend whether Tallon ple should proceed with the product launch. You have held discussions with a number of divisions in Tallon ple and a summary of these discussions is as follows: 1. New machinery costing 1 Sm will be required immediately. The machinery is expected to have scrap value of 0.3m. at the end of the project. Tallon ple has a policy of depreciating machinery costs in its accounts at the rate of 25% per annum on a straight-line basis. 2. The new product will be produced in an existing factory which is rented by Tallon ple under a long-term lease. The factory is currently unoccupied and due to an oversupply of property available in the market the factory is expected to remain unoccupied for the foreseeable future. Tallon ple pays annual rent of 250,000 on the factory under the lease. Variable overheads of production are estimated at 1 per unit. Each unit of the new product requires half of a kilo of raw materials to manufacture. The current cost of materials is 10 per kilo and this cost is expected to increase by 10% per annum over the next four years. Each unit of the new product takes a quarter of an hour to manufacture. Machine operators are currently paid 8 per hour and no wage increases are forecast for the next four years. The marketing director plans to spend 200,000 in each of the first two years, promoting the product. Once the market has been established this spend will be reduced to 100,000 for each of the last two years. Tallon ple estimates that an additional 200,000 will be required for working capital. Tallon ple's bank has agreed to provide a term loan at a fixed interest rate of 8% per annum to cover the cost of the investment in machinery and working capital. Tallon ple has a cost of capital of 12% per annum which it uses in evaluating all new capital projects. Taxation may be ignored and calculations should be made to the nearest 000. Tallon ple has a policy of requiring all projects to payback within a three year period and to produce a positive Net Present Value before being accepted. Required Calculate the relevant cash flows to be used in evaluating the product. Calculate the Payback Period. 3. Calculate the Net Present Value Draft a brief report for the management of Tallon ple, advising if it should proceed with the project with supporting reasons for your decision. In addition to the calculations above, outline two non-financial factors which you feel Tallon ple should consider before making a final decision on the project