Using the information provided betow, answer the following questions.

$(20$ marks$)$

INFORMATION

Monts Carlo Manufacturing Limited $($MCM$)$ is a large JSE$-$listed company. The company is evaluating an investment proposal to manufacture Product AX$228,$ which has performed weil in test marketing trials conducted recently by the research and development $($R&D$)$ division. Product AX$22$B will be manufactured using fully automated process which would significantly increase noise level from MCM$\text{'}$s factory.

The following information relating to this investment proposal has now been prepared:

$\backslash$table$[[$Initial investment,R$30$ million$],[$Selling price $($current price terms$),\backslash$table$[[$R$200$ per$],[$unit$]]],[$Expected selling price inflation,$3\%$ per year$],[$Variable operating costs $($current price terms$),$R$80$ per unit$],[$Fixed operating costs $($current price terms$),\backslash$table$[[$R$2000],[$per year$]]],[$Expected operating cost inflation,$4\%$ per year$]]$

The R&D division has prepared the following demand forecasts as a result of its test marketing trials. The forecast

Reflects expected technological change and its effect on the anticipated life$-$cycle of Product AX$22$B$.$

$\backslash$table$[[$Year$,1,2,3,4],[$Demand $($units$),80000,100000,180000,70000]]$

It is expected that all units of Product AX$22$B producad will be sold, in line with the company's policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of Product AX$22$B is planned to end. For investment appraisal purposes, MCM uses a nominal $($money$)$ discount rate of $10\%$ per year and a target retum on capital employed of $30\%$ per year. Ignore taxation.

REQUIRED:

$3\mathrm{.}1.$ Calculate the following values for the investment proposal:

$3\mathrm{.}1\mathrm{.}1.$Net present value $($round off amounts to the nearest Rand$)$

$(5$ Marks$)$

$3\mathrm{.}1\mathrm{.}2.$ Internal rate of retum $($show all calculations and round off answer to two decimal places

$(3$ Marks$)$

$3\mathrm{.}1\mathrm{.}3.$ Retum on capital employed $($accounting rate of return$)$ based on average investment $($show all

$(3$ Marks$)$

calculations and round off answer to two decimal places$).$

$3\mathrm{.}2.$ Briefly discuss your findings in each section of $3\mathrm{.}1$ above and advise whether the investment proposal

$(4$ Marks$)$

is financially acceptable.

$3\mathrm{.}3.$ Discuss how the objectives of MCM$\text{'}$s stakeholders may be in conflict if the project is undertaken.

$(5$ Marks$)$