Section A- Compulsory Question Question 1 Kicvarom Plc is considering the manufacture of a new product. _The company has existing buildings that could be sold to buyers for E120,000. _The balance sheet records the building as having a value of E60,000. The new product, which has a life of 5 years, will require installation of sophisticated machinery. ..This will cost E200,000... At the end of its life, the machine can be sold for E10,000. Depreciation should be charged on the machine at 25 per cent using the reducing balance method. Demand for the new product is expected to be 4,000 units in year 1 and 7,000 units in each of years 2 to 5. The sale price will be E110 per unit; direct labour, direct material and variable overheads will cost E60 per unit and additional fixed expenses of E50,000 per annum will be_ incurred. An investment in working capital is required in year 0 of E75,000. This will be_ increased to E100,000 in year 1. No further increases are required over the life of the project. Assume that the company pays corporation tax at 24 per cent on its taxable profit a year after the end of the year and requires a rate of return of 10 per cent per annum after tax on this type of project. Required: Should the company undertake the investment? Use the following four investment appraisal methods and state all your assumptions. a) NPV (20 marks) b) Payback period (assume the benchmark is 2 years) (5 marks) c) Discounted payback period (5 marks) d) Profitability index (10 marks) 2 of 5 860 Words (40 marks)