The management of GRG plc is considering investing in the manufacturing facilities needed to manufacture a new product. Development costs of 350 000 have already been spent to ensure that the new product will meet the high technical requirements that are expected in the industry.

The new machine will cost 12 million in 2018 and will be depreciated for tax purposes, using the straight-line method over three years, which is the expected life of the machine. At the end of its life, the machine will have no value.

When the new plant is operational at the beginning of 2019, the companys working capital will increase by 300 000 and the working capital will increase to 330 000 in 2020.

The sales in 2019 will be 15 million and it is expected that the sales will increase by 10 per cent in 2020 and 2021. At the end of the useful life of this machine, a new improved product will be introduced and this product will be withdrawn from the market.

The variable costs will be 30 per cent of the sales value and the fixed costs, excluding the depreciation expense, are expected to be 4 million per annum.

Tax is payable at 30 per cent and is paid in the next year. For example, tax on the 2019 activities would be paid in 2020 The company has other very profitable products and the required rate of return is 16 per cent.

Required:

Using the Discounted Cash Flow approach, recommend if the company should invest in the new plant?