The Munchies Company is a successful potato chip manufacturer. Since it was established five years ago it has gradually increased its range of plain, sour cream and onion, cheese and bbq chips. The sales director has now come to the board with a proposal to expand the company line to include range of healthy chips including plantain, beets, and kale. This will involve the purchase of new machinery; the initial outlay will be £135 000. The finance director and the sales director meet to discuss sales projections for the new range of chips. They forecast the following net cash inflows over the five year period until the machinery will need to be replaced:      

                                              £

Year 1                         35 000

Year 2                         47 000

Year 3                         52 000

Year 4                         55 000

Year 5                         55 000

In addition to these inflows, it is expected that the machinery will be sold for scrap at the end of year five for £10 000. The company’s policy is to depreciate machinery on the straight line basis over its estimated useful economic life.

Required:

i) Calculate ARR for the investment project               (5 Marks)

ii) Calculate the payback period for the project           (5 marks)