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. [4 marks]

b) Calculate the required rate of return of this project. [3 marks]

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? [3 marks]

d) Calculate the Net Present Value (NPV) of this project. Explain if the project should be accepted according to NPV decision rule. [4 marks]

e) Calculate the Internal Rate of Return (IRR) of this project. Explain if the project should be accepted according to IRR decision rule. [3 marks]

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. [3 marks]