Polycorp is considering an investment in new plant of $3.15 million. The project will be

partially financed with a loan of $2,000,000 which will be repaid over the next five years in

equal annual end of year instalments at a rate of 6.25 percent pa. Assume straight-line

depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments

and interest are shown in the table below. Cost of capital is 12.65% pa (the required rate of

return on the project). A salvage value of $255,000 is expected at the end of year five and is

included in the cash flows for year five below. Ignore taxes and inflation.

Year Year One Year Two Year Three Year Four Year Five

Cash Inflow 890,000 830,000 815,000 910,000 1045,000