Bradley Brewing plc has been selling beers throughout the South West of England for a number of years. During the year ended 31 December 2020 the company developed a new beer, AB Strong Ale, and commissioned a market research survey into the feasibility of launching the new product. The costs of development and the market research was 5m. The results of the market research were positive and indicated that the market was ready for the new brew. The directors therefore decided to stop production of one of their products, XY Mild to concentrate on AB Strong Ale. By 31 December 2020 the following estimates had been made:

The capital cost of new machinery and plant to produce AB would be 30m; The new machinery and plant would be depreciated at 5.6m per annum;

At the end of the project the machinery and plant would be sold for 2m; Cessation of production of XY Mild will result in the loss of existing net revenues of 6m per annum for the next 3 years; Investment in additional working capital is estimated at 7m. However, it is expected that 3m of this requirement will come from the release of working capital following the cessation of production of XY Mild that would otherwise find no use;

At the end of the project it is expected that the working capital will all be released;

Demand for the AB Strong Ale from new customers is expected to be 22m per annum;

Materials and other costs are expected to amount to 8m per annum. In addition to the data given in Bradley Brewing plc, it is estimated that the project life will be 5 years. At the end of this time the company expects to have developed a replacement brew. Bradley Brewing plc's cost of capital is 9% pa. Required:

(i) 1. Compute the payback period for the project.

(ii) 2. Compute the Accounting rate of return for the project.

(iii) 3. Compute the net present value (NPV) for the project;

(iv) 4. Compute the internal rate of return (IRR) for the project. (Hint - Try 20%!)

(v) 5. Advise on whether the project should be accepted with reference to your calculations.

6. Assess the riskiness of the project by a 15% change in Bradley Brewing plc's cost of capital.