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The directors of Annie Co are considering a planned investment project costing 5 million, payable at the start of the first year of operation The following information relating to this investment project has now been prepared: initial investment 5 million Selling price (current price terms) 40 per unit Expected selling price inflation 4% per year Variable operating costs (current price terms) 12 per unit Fixed operating costs (current price terms) 160,000 per year Expected operating cost inflation 4% per year The research and development department has prepared the following demand forecast. Year 1 Demand (units) 40,000 2 55,000 3 75,000 4 80,000 It is expected that all units produced will be sold, in line with the company's 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 is planned to end. For investment appraisal purposes, Annie Co uses a money cost of capital of 10% per year and a general inflation of 4% per year. Ignore taxation. Required: a) Calculate the following values for the investment project (show all workings clearly): (i) Net present value using money cost of capital and real rate of retum (10 marks) (ii) Internal rate of return using the money cost of capital (5 marks) b) Discuss your findings in each section of (a) above and advise whether the investment project is financially acceptable based on the appraisal methods applied. (10 marks) (Total: 25 marks)

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