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QUESTION 3 (16 marks) Consider the following project. The initial investment of the project is made in three equal instalments of $90,000. The first instalment will be made when the project commences (time 0), the second instalment will be made at the end of the first year and the last instalment will be made at the end of the third year. It takes two years to get the machinery ready and set up the production line. Starting from the 3rd year, continuous income will be generated from the sale of products. We assume rate of income is constant within each year. Throughout the 3rd year, the rate of income is expected to be $50,000 per annum. Throughout the 4th year, the rate of income is expected to be $45,000 per annum. Throughout the year, the rate of income is expected to be $40,000 per annum. After that, we assume the rate of income will increase by 5% compound at the beginning of each year. We also know during the 10 year, maintenance of the machinery employed in the project will be required, which will cost the investor $120,000 at the end of the 10th year. The project will continue generating income up to the end of the 20 year. After that, no further income will be generated. The interest rate is 8% p.a. effective throughout the duration of the project (a) Determine the viability of the project by considering the net present value (NPV) of the project at time 0. (6 marks) (b) Comment on whether we should use internal rate of rate (IRR) to assess the viability of the project (2 marks) (e) Show that the discounted payback period (DPP) does exist and then calculate the value of DPP for the project (8 marks) QUESTION 3 (16 marks) Consider the following project. The initial investment of the project is made in three equal instalments of $90,000. The first instalment will be made when the project commences (time 0), the second instalment will be made at the end of the first year and the last instalment will be made at the end of the third year. It takes two years to get the machinery ready and set up the production line. Starting from the 3rd year, continuous income will be generated from the sale of products. We assume rate of income is constant within each year. Throughout the 3rd year, the rate of income is expected to be $50,000 per annum. Throughout the 4th year, the rate of income is expected to be $45,000 per annum. Throughout the year, the rate of income is expected to be $40,000 per annum. After that, we assume the rate of income will increase by 5% compound at the beginning of each year. We also know during the 10 year, maintenance of the machinery employed in the project will be required, which will cost the investor $120,000 at the end of the 10th year. The project will continue generating income up to the end of the 20 year. After that, no further income will be generated. The interest rate is 8% p.a. effective throughout the duration of the project (a) Determine the viability of the project by considering the net present value (NPV) of the project at time 0. (6 marks) (b) Comment on whether we should use internal rate of rate (IRR) to assess the viability of the project (2 marks) (e) Show that the discounted payback period (DPP) does exist and then calculate the value of DPP for the project (8 marks)

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