Bing plc is evaluating the purchase of a machine and has the following information:
Initial investment........................................£350,000
Residual value...................................................nil
Expected life.............................................10 years
Sales volume..............................20,000 units per year
Sales price..........................................£8.50 per unit
Variable cost........................................£3.50 per unit
Fixed costs.......................................£24,875 per year
Cost of capital..........................................15 per cent
(a) Calculate the internal rate of return of the project.
(b) Assess the sensitivity of the net present value to a change in project life.
(c) Assess the sensitivity of the net present value to a change in sales price.