QUESTION $7$

Graceland Inc intends to build a processing plant in a local community. You have been asked by the management of Graceland to perform a feasibility analysis of the project to determine its viability. Your preliminary assessment shows that the construction of the plant will take two years at an estimated cost of GHS $140,000.$ It has been established that $60\%$ of the investment cost will be paid in Year $1$ and the remaining $40\%$ in Year $2.$

Production will start at the beginning of Year $3$ and annual production cost will be

GHS$15,000$ per year. Operation and Maintenance cost which begins in Year $3$ will be GHS$5,000$ each year. It has been estimated that Cash Inflows to be generated by the factory will be as follows: Year $3=$ GHS $45,000$; Year $4=$ GHS $55,000$; Year $5=$ GHS $55,000$; Year $6=$ GHS $55,000$; Year $7=$ GHS $55,000$; and Year $8$ to Year $10=$ GHS$50,000$ per year. It has been assumed that the project life span will be $10$ years with a salvage value of GHS$18,000.$

Required:

a$.$ Using a discount rate of $12$ percent, advise the Assembly on the project using the: i$.$Net Present Value $($NPV$)$

ii$.$Profitability index $($PI$)$

iii.Internal Rate of Return $($IRR$).$ iv$.$Modified Rate of Return $($MIRR$)$

b$.$ Outline qualitative indicators that should be considered in selecting a project?