The product development department of Dalglish plc is contemplating renting a factory building on a four-year lease from 1 January Year 1, investing in some new plant and using it to produce a new product, code named DAG7. Since there appears to be no possibility of the plant continuing to be economically viable beyond a four-year life, it has been decided to assess the new product over a four-year manufacturing and sales life.

Under the lease the business will pay 100,000 annually. The plant is expected to cost 600,000. This will be bought and paid for on 1 January Year 1 and is expected to be scrapped (with zero proceeds) on 31 December Year 4. The business will depreciate this asset, in its accounts, on a straight-line basis (25 per cent each year).

Each unit of DAG7 is estimated to give rise to a variable labour cost of 200 and a variable material cost of 100. DAG7 manufacture will be charged with an annual share of the businesss administrative costs, totalling 150,000 each year. Manufacture and sales of DAG7s are expected to increase total administrative costs by 90,000 each year.

Manufacture and sales of DAG7s are expected to be as follows:

Year Ending 31 December	Year	Units of DAG7
	1	400
	2	600
	3	500
	4	200

These will be sold for an estimated 1,400 each.

For investment appraisal purposes you should assume that all cashflows relating to revenue and costs occur at the end of the year to which they relate.

The businesss accounting year end is 31 December each year. It has been decided, given the level of risk involved with the project to use a discount rate of 15 per cent a year.

An extract from the present values tables is given here:

Discount Factor	Year 1	Year 2	Year 3	Year 4
10%	0.909	0.826	0.751	0.683
15%	0.870	0.756	0.658	0.572
20%	0.833	0.694	0.579	0.482
25%	0.800	0.640	0.512	0.410
30%	0.769	0.592	0.455	0.350

Required

1. Identify the annual net relevant cash flows and use this information to assess the project on a net present value basis at 1 January Year 1. (20 marks)

2. Estimate the internal rate of return of the project. (10 marks)

3. Identify any other factors that Dalglish plc should consider when evaluating whether to proceed with this project, and recommend whether or not you believe the investment in DAG7 should be undertaken. (10 marks)