You have been tasked by the management team of the Peters to evaluate the desirability of hypothetical overhaul of their ice cream tub injection moulding equipment. The new equipment will enhance production capacity and is more efficient than the existing equipment. Another benefit from the new equipment is that it will enable Peters to manufacture tubs with a higher percentage of low-grade recycled plastic inputs.

Other key details and estimates associated with the new ice cream tub injection moulding equipment are supplied below:

• The new equipment will cost $18 million and will have a 8 year useful life. It will also cost $700,000 to install the new machine and $1.1 million to remove and dispose of the existing equipment.
• Current ice cream tub sales are $70 million. As a result of the enhanced production capacity from the new equipment, ice cream tub sales are expected to increase by 2.5% p.a. On average, cost of sales are 35% of sales revenue.
• Compared to the existing equipment, the new equipment will cost $2.1 million less to operate p.a.
• Peters will spend $500,000 in years 1 and $450,000 in year 2 to promote the environmental benefits from the new equipment.
• The new equipment will require a major maintenance service in years 4 and 6. These services will cost $560,000 and $590,000, respectively.

The firm's tax rate is 30%. The firm requires a 12% required rate of return on all potential investments. All calculations must be performed in Excel.

Required

In relation to the above proposal:

1. Calculate the annual after tax cash flows (1 mark) and annual after tax profit (1 mark).
2. Calculate the payback period (0.5 mark).
3. Calculate the net present value (0.5 mark).
4. Calculate the internal rate of return (0.5 mark).
5. Calculate the accounting rate of return based on the average and initial investment (0.5 mark).
6. Provide an overview of key environmental factors that the firm should consider when evaluating the proposal (2 marks).
7. Based on an assessment of the above and other strategic factors, discuss whether the firm should go ahead with the proposal (2 marks).
8. Discuss how sensitive your recommendations are to changes in assumptions in regards to the financial impact of the new capital investment. In your discussion, include examples which illustrate how changes to at least two assumptions impact the financial analysis (2 marks).