One of Example Ltd’s main competitor has been inciting a price war as they managed to import cheap products that are well below Example Ltd’s full product cost. A production manager of Example Ltd’s has proposed investment in advanced technology to reduce labour costs while increasing production volume and product consistency.

Information about the proposed project is as follows:

• $5,600,000 investment in new equipment is required. The equipment has an estimated useful life of 8 years and no residual value.
• The existing equipment can be sold for a current market value of $200,000.
• The new equipment will be able to automate parts of production, assembly and inspection, making eight employees redundant. There is an estimated cost savings of $420,000 per year from the job cuts.
• Expected incremental revenue of $550,000 per year due to greater production volume and higher product quality and consistency.
• There will be additional maintenance costs of $100,000 per year.

Example Ltd requires a rate of return of 8%. Ignore tax implications.

Required:

1. Compute the following for the proposal (present value tables are available on the next page):

1. Net present value.
2. Internal rate of return.
3. Payback period.
4. Accounting rate of return with initial investment as the denominator.

2. Describe three qualitative considerations that the managers should consider in making the decision.