Manchester Producers Incorporated (MPI) is a company involved in the production of football shoes for export to the Caribbean. The company wishes to ascertain the viability of investing in new digital sewing machine. The machine is to be purchased from South Korea, for $6,200,000. The equipment is expected to have a useful life of four years and will incur the following additional costs below:

Freight charges $800,000

Custom duties $600,000

The equipment is expected to have a residual value of $700,000 and is to be depreciated using the straight-line method. All capital projects are appraised using the company’s Weighted Average Cost of Capital (WACC), which is based on 60% equity and 40% debt. The equity shareholders of the company currently require a return of 18%. The debt of the company is comprised of bonds and the yield to maturity on these bonds before tax is 12%. The marginal tax rate is 30%. Additionally, inventory costing $400,000 is required at the start of the project.

The new project is expected to yield revenues of $3,200,000 annually. Operating cost will be $1,900,000 per annum. Depreciation is an allowable deduction for income tax purposes. The new equipment is also expected to improve the efficiency of overall of operations, resulting in a reduction in the staff required in the Sewing Department. Three (3) staff members from the Sewing Department will be transferred to the Cutting Department, where there was an urgent need for staff. The annual salary of each staff member is $250,000. Staff members in both departments received the same rate of pay.

Required:

a) Calculate the Net Present Value. (12 marks)

b) Calculate the Internal Rate of Return. (8 marks)

c) Calculate the Profitability Index (3 marks)

d) Advise management on the viability of the machine. (4 marks)