Walton Hall Cosmetics plc (WHC) is evaluating whether to launch a new brand of skin cream, Close Em Pores (CEP). If it launches, it will be produced on a company site (land and buildings). If the project does not go ahead, the company will be able to lease out the unused site at an annual rent of $0.75m.

WHC commissioned two reports; the first was on the likely production costs. This report cost $1m and has already been paid for. The other report, costing $1.5m, provided market data. This report has not yet been paid for yet as WHC negotiated a 1-year credit period.

These reports suggest the following:

Investment in new equipment will cost $20m. This equipment attracts tax capital allowances of 25% for each of the first four years of use. It will be scrapped at the end of the 5-year project for $2m (a taxable amount). The equipment has a five-year life and will be depreciated in the accounts by $3.6m per annum in the accounts.

Revenues will be $17m in the first year. This is expected to rise by 2% for each of the remaining 4 years, to and including year 5. Costs (not including depreciation) will be 4.25m in the first year and are expected to rise by 0.5% per annum.

Sales of CEP will impact other brands sold by the company. The pre-tax cash surplus (that is, cash from sales less costs, before tax) from such lost sales is estimated to be $2.5m and will rise by 2% per annum.

Head office charges all new projects a set fee of 10% of its revenues to cover existing overheads.

The tax rate for WHC is 25%, payable in arrears. WHC expect projects to make a return of 8.25% per annum.

a.Using an Excel model calculate the net present value, internal rate of return and the payback of this project