The Kalgan Driftwood Company Background The Kalgan Driftwood Company (Kalgan) was established in 1950. It is located on a 100 hectare site in a beautiful scenic location on the banks of the Kalgan River. The company has built its reputation on making quality furniture at affordable prices from cast-off jarrah wood from a nearby timber mill. Re- cover service Kalgan, which sources its fabrics from Indonesia and Vietnam, offers a choice of over 50 different fabrics. Kalgan is considering offering a re-cover service to supply replacement cushions when the existing ones wear out or customers wish to change their fabric since a recent study found that customers kept their Kalgan furniture for an average of 18 years. The re-cover service will make three sizes of covers: large, medium and small. The company accountant has carried out an investment appraisal of the new re-cover service assuming a project life of 5 years. The net cash flows on a relevant cost basis for each of the five years were as follows: Year Net cash flows 0 (140,000) 1 23,240 2 45,780 3 54,320 4 54,320 5 54,320 3 Budget data for the first year of the re-cover service are as follows: Large Medium Small Sales (units) 2,250 1,450 2,400 Selling price per unit 115 90 58 Direct labour cost per unit 12.60 8.40 6.30 Fabric cost per unit 44.80 32.20 21 Contribution per unit 54.60 43.40 28.70 Specific Fixed Costs: Factory power costs: 84,000 per annum Lease of equipment for re-cover service: 70,000 per annum The expected time to produce each size of cover is as follows: Re-cover Service Large Medium Small Time to make each cover 0.6 hour 0.4 hour 0.25 hours The production director has now informed the board that the supply of skilled labour for year 1 will be restricted to a maximum of 2,500 hours. The companys cost of capital is 8% per annum (iv) Calculate the payback period for the re-cover project. (5 marks)