Kingston Corp. is considering purchasing a new machine, which costs $2,000,000 today. The investment is forecasted to have revenue in the first year of $600,000. Revenue is projected to increase at 5% p.a., and the operating cost is 20% of annual revenue. The life of the machine is 5 years after which it is expected to be sold only for 5% of the original cost. The investment is financed 60% through debt which has a cost of 10% p.a. and shareholders expect a 15% p.a. return.

a) Draw the timeline and set out net cash flows by year.

b) Calculate the required rate of return of this project.

c) Calculate the payback period (PBP) of this project. Should Kingston Corp. accept this project if its requirement is to accept projects that pay back within 4 years?

d) Calculate the Net Present Value (NPV) of this project. Explain if the project should be accepted according to NPV decision rule.

e) Calculate the Internal Rate of Return (IRR) of this project. Explain if the project should be accepted according to IRR decision rule.

f) Compared to the NPV approach and the IRR approach, the Payback Period approach is less sophisticated and robust. Identify three shortcomings of the Payback Period approach.