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Cardiff Chemicals co. (family company) is considering the purchase of a new plant to produce a new chemical code-named X9. The plant is readily available and can be installed immediately at a cost of 160,000. The company has already spent 40,000 on researching and developing the new chemical. The best estimate of revenues and costs arising from the operation of the new plant are as follows:

Required: a) Produce the annual net cash flows associated with the chemical and calculate the net present value. The companys cost of capital is 8%. (30 marks)

b) How would your view of the advisability of purchasing the plant if the companys cost of capital rose to 12%? (10 marks)

c) Calculate the internal rate of return of the project and explain what it means. Please support your discussion with academic references. (10 marks)

d) Discuss whether it would be more appropriate to use a conventional technique of investment appraisal such as payback or accounting rate of return. Please support your discussion with academic references. (15 marks).

e) Calculate the payback period and the accounting rate of return and discuss how you would use this information in presenting the results of your analysis to the decision makers at Cardiff Chemicals. (10 marks)

f) Discuss the possible ways to finance buying the new machine. Please highlight advantages and disadvantages of these potential methods and which one you think is more relevant to Cardiff Chemicals Co, as a family firm. (25 marks).

1 2 5 4 100 100 Years 3 120 40 23 94 Selling price ( per unit) Variable cost ( per unit) Annual fixed costs (000) Sales volume (units) 2 120 50 23 1,000 30 50 23 23 1,000 40 23 1,000 800 1,200

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