Teslayan Plc is a multinational pharmaceutical company headquartered in Investland. Teslayan Plc plans to buy new manufacturing equipment to meet expected demand for the manufacturing of a viral drug. This equipment will cost £285,000 and last for four years, at the end of which time it will be sold for £20,000. Teslayan Plc expects demand for the drug to be as follows:

Year Demand (units) （1） 28,000 （2 ） 30,000 （3 ） 33,000 （4 ） 35,000 The selling price for the drug is expected to be £12 per unit and variable cost of production is expected to be £8 per unit. Incremental annual fixed production overheads of £25,000 per year will be incurred. The selling price and costs are all in current price terms. Due to the current high rate of inflation caused by the pandemic, selling prices and costs are expected to increase as follows: Increase in Selling price of product: 3% per year ; increase Variable cost of production: 4% per year ; IncreaseFixed production overheads: 5% per year

Other information Teslayan Plc has in issue 900,000 shares with an ex-dividend market value of £7.2 per share. A dividend of 70 pence per share for 2020 has just been paid. The pattern of recent dividends is as follows: the Year 2017 2018 2019 2020 Dividends per share (pence) 60 63 67 70 Teslayan Plc also has in issue 6.5% bonds redeemable in five years’ time with a total nominal value of £500,000. The market value of each £100 bond is £104. Redemption will be at a nominal value. Teslayan Plc pays tax at an annual rate of 30% one year in arrears. It can claim capital allowances on a 25% reducing balance basis. Required:

a)Calculate the weighted average cost of capital of Teslayan Plc.

b)Calculate the net present value of buying the new machine and advise Teslayan accordingly.

c)Write a report to the management of Teslayan Plc. Critically comment on the validity of your result and decision in (b) above and why the NPV method of investment appraisal might be considered superior over the Internal rate of return method.