Question 2 (25 marks) Good Hope Ltd introduced a new product, NEW AGE, to its range last year. The machine used to mould each item is a bottleneck in the production process meaning that a maximum of 5,100 units per annum can be manufactured. The NEW AGE product has been a huge success in the marketplace and as a result, all items manufactured are sold. The marketing department has prepared the following demand forecast for future years as a result of feedback from customers. Year 2022 2023 2024 2025 Demand (units 7 100 9 100 11 100 4 100 The directors are now considering investing in a second machine that will allow the company to satisfy the excess demand. The following information relating to this investment proposal has now been prepared: If production remained at 5,100 units, the current selling price would be expected to continue throughout the remainder of the life of the product. However, if production is increased, it is expected that the selling price will fall to $45 per unit for all units sold. Again, this will last for the remainder of the life of the product. No terminal value or machinery scrap value is expected at the end of four years, when production of NEW AGE is planned to end. For investment appraisal purposes, Good Hope uses a nominal discount rate of 10% per year and a target return on capital employed of 20% per year. Ignore taxation. Required: (a)Calculate the following values for the investment proposal: (14 marks)

(i)net present value;

(ii) internal rate of return;

(iii)return on capital employed (accounting rate of return) based on initial investment; and.

(iv)discounted payback period

(b)Discuss your findings in each section of (b) above and advise whether the investment proposal is financially acceptable. (5 marks)

(c)Explain briefly the key steps that should be included in a company's capital budgeting process. (6 marks)