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Mini Case Study Farmers Alliance Farmers Alliance is evaluating an investment proposal to manufacture product DD3 which requires an investment in new machinery. It has performed well in test marketing trials conducted recently by the companys R&D department which costs the company GH500,000. The Management Accountant has prepared the following information relating to the investment proposal: Initial investment in machinery GH9 million Selling price (current price terms) GH40 per unit Expected selling price inflation 3% per year Variable operating costs (current price terms GH16 per unit Fixed operating costs (current price terms) GH340,000 per year Expected operating cost inflation 4% per year The R&D department has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life cycles of product DD3. Year 1 2 3 4 Demand(units) 120,000 140,000 240,000 90,000 It is expected that all units of product DD3 produced will be sold, in line with the companys 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 productDD3 is planned to end. The machine attracts 25% capital allowance. Farmers Alliance uses a nominal (money) discount rate of 15% per year and a target return on capital employed of 25% per year. Corporation tax is 25% and paid in the same year as related profit. The target payback period is 3 years for the company. . Required: (a) Identify and briefly explain the key stages in the capital investment decision making process, and the role of investment appraisal in this process. (3 marks) (b) Evaluate the proposal using the following techniques: (i) Net present value (10 marks) (ii) Internal rate of return (4 marks) (iii) Discounted payback period (2 marks) (iv) Accounting rate of return (2 marks) (c) Discuss your findings in each section of (b) above and advise whether the investment proposal is financially viable. (4 marks)

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