Hero PLC is considering setting up a new project at a cost of MVR 500,000. It is expected to stay economical for 5 years after which the company expects to upgrade to a more efficient technology and sell it for MVR 10,000.

Following is an extract from a report prepared by the marketing department and engineering department.

Selling Price (current terms) MVR 15 per unit

Variable cost: MVR 8 per unit

Incremental annual fixed cost: MVR 30,000 per annum

Selling price and costs are all in current price term

Selling price and costs are expected to increase as follows:

Increase Selling price : 3% per year

Variable cost of production : 4 %per year

Fixed production overheads : 5% per year

Following is the expected demand over 5 Years

Year	1	2	3	4	5
Demand	25000	32000	36000	37500	35000

Other information

Hero PLC has a real cost of capital of 4.2% and general inflation is expected to be 6.3% per year.

Required:

1. Calculate the net present value of buying new machine and commend on the finding. Why NPV is considered as a superior method for investment appraisal.

(15 marks)

2. Calculate the return on capital employed (accounting rate of return) based on the average investment and comment on your findings.

(7 marks)

(c) Calculate internal rate of return and comment on it if Hero PLC has a target return on capital employed of 20%.

(8 marks)