Benetton Plc is an established manufacturer and retailer of industrial water recycling equipment for commercial outlets such as cafes and restaurants. They supply equipment across the United Kingdom.

It is company policy that before final approval is granted for any new products, a full financial analysis of the proposed project must take place.

A new product called Clear Water is being proposed. The Clear Water project is about to be evaluated and the following projections have been prepared:

Clear Water machines will be leased to outlets for a fixed term of five years at £2,500 per machine per year. 50 outlets have already registered their interest in leasing a Clear Water machine. At the end of the five years, the outlet will have the opportunity to purchase the machine for £1,675. It is expected that 40 of the outlets will take up this offer. The remaining machines will be donated to shelters for the homeless.

The annual lease covers maintenance and service charges. Each machine will be serviced three times a year by Pure Water Plc engineers. Each visit to an outlet takes approximately two hours and costs Benetton £140. In addition, in the case of a fault developing, an outlet can call out an engineer. Approximately 45 fault call outs a year are expected and each call out costs £70.

The investment in 50 Clear Water machines will cost £165,000.

In addition Pure Water PLC will incur fixed costs specific to the Clear Water project of £15,500 per annum and in accordance with policy, the project will also incur an annual charge equivalent to 25% of its direct costs to cover general fixed overheads of the business.

The company’s cost of capital is 12%.

 

Required:

Part A

a)Calculate the payback period for the project.

b)Calculate the Net Present Value (NPV) on the project.

c) Calculate the Internal Rate of Return (IRR) of the project

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