Terminator Pest Control (TPC), Inc. anticipates unit sales for a new household- use electronic rodent eradication system as follows:

Year Unit sales 1 80,000 2 90,000 3 95,000 4 99,000 5 75,000

The eradication system will require $875,000 in net working capital to start. Total annual fixed costs are expected to be $200,000. Variable production costs are expected to be $75 per unit, and the units are priced at $105 each. The equipment needed to begin production has a purchase cost of $9,000,000, freight and customs duties amount to $500,000 and installation and testing will be $$250,000. In five years, the equipment can be sold for 25% of its purchase cost. TPC has a required return on all its projects of 12%. Required: a. Compute the projects cash flows. [21 marks] b. Calculate: i. The payback period [6.5 marks] ii. Net present value (NPV) [10.5 marks] iii. Internal rate of return (IRR) [13 marks] iv. Accounting rate of return (ARR) [7 marks] c. Write a memo (in good form) to the Managing Director briefly explaining the significance of the required return of 12%, and advising him whether the company should undertake the project. Your advice should be supported by the

results of your calculations in part (b). You should also include a discussion of THREE non-financial factors which should be considered when making the decision