XYZ Ltd. is considering the purchase of a new machine to make wood-burning stoves. They have had a

market research survey conducted at a cost of BDT 200,000. This predicts demand of 4,000 stoves per

annum at a selling price of BDT 750 per stove for 10 years. The machine will cost BDT 2,000,000, payable

in two instalments as follows.

Amount BDT

1 January 20X1 1,000,000

31 December 20X2 1,000,000

Depreciation of BDT 180,000 per annum over the next 10 years will be provided to write down the machine

to its scrap value. Use will also be made of some existing equipment which originally cost BDT 150,000, has

a book value of BDT 75,000 and would cost BDT 200,000 to replace.

XYZ Ltd. is currently negotiating the sale of this machine for BDT 100,000. Variable cost per stove will be

BDT 600 and in accordance with the normal policy BDT 250,000 of fixed overheads will be apportioned to

the new product line per annum.

The machine will require its first service one year after purchase and from then on will be serviced every

year. Each service will costs BDT 50,000.

The machine will be brought into use immediately to build up inventory, but the first revenues will not be

received until 31 December 20X2. Variable costs are payable annually at the same time as the revenues are

received.

Required:

Calculate the following:

(a) Return on capital employed on an initial investment basis

(b) Return on capital employed on an average investment basis

(c) Payback period

(d) NPV at the company's cost of capital of 15%

(e) Internal rate of return of the project

(f)The sensitivity of your advice based on the NPV computed in (d) to errors in the estimates of

(i) The required rate of return

(ii) The selling price per unit

(iii) The level of demand

Your answer should also include a comment on the sensitivities calculated.