The directors of Payton Co are considering a planned investment project costing $25m, payable at the start

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Question:

The directors of Payton Co are considering a planned investment project costing $25m, payable at the start of the first year of operation. The following information relates to the investment project:

Yr1 Yr2 Yr3 Yr4

Sales volume (units/year) 520,000 624,000 717,000 788,000

Selling price ($/unit) 30.00 30.00 30.00 30.00

Variable costs ($/unit) 10.00 10.20 10.61 10.93

Fixed costs ($/year) 700,000 735,000 779,000 841,000

This information needs to be adapted to take into account 4% inflation of selling prices per year and 3% inflation of variable costs per year. In nominal dollars, the fixed costs, which are incremental and are hooked up with the investment project. The volume of sales for the fourth year will continue in the foreseeable future. Payton Co pays corporate tax in arrears of 30% one year. The company can claim a tax-allowable depreciation based on a balance reduction of 25%.

The Directors of Pella Co are of the opinion that all investment projects must be evaluated over four years with an assumed terminal values of 5 percent of the initial investment cost at the end of the fourth year. The net present value as well as the discounted return must be used, with a maximum period of two years of discounted payback. The real capital cost of Payton Co after tax is 7 percent and its nominal capital cost after tax is 12 percent.

(i) Calculate the net present value of the planned investment project.

(ii) Calculate the discounted payback period of the planned investment project.

(b) Discuss the financial acceptability of the investment project.