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Chatsworth, the home of the 12th Duke and Duchess of Devonshire, is one of the finest and most palatial houses in the UK, set in over 1,000 acres of parkland in the Peak District National Park, England. The existing adventure playground was coming to the end of its life and it was time to make a decision about what to do with it. It was costing us about 18,000 each winter to maintain it and these costs were increasing year on year. We believed we could get a better one for around 200,000. The management team came up with four options, remove it, do nothing, replace with similar, replace with substantially better.' It was felt that removing the playground altogether was a realistic option. The Duke and Duchess had a view that Chatsworth should be true to its roots and traditions. Whereas one could make an argument for a farmyard being part of a country estate, an adventure playground was considered to fit less well. The downside would be that the lack of an adventure playground, which is a big attraction for families with young children, could have an impact on visitor numbers. However, there would be a savings in tems of site maintenance. The 'do nothing' option would entail patching up the playground each year and absorbing the increasing maintenance costs. This could be a low impact option, in the short term at least. However, it was felt that this option would simply delay the replace/remove decision by five years at most. The current playground was no longer meeting international safety standards so this could be a good opportunity to replace the playground with something similar. It was estimated that a like-for-like replacement would cost around 200,000. Replacing the playground with a substantially better one would entail a much greater cost but could have an impact on visitor numbers. REQUIRED 1. For the investment option "replace it with similar" only: The expected annual operating profit in the first 4 years is shown on the table. The business has estimated cost of capital 10%. It uses a straight-line method of depreciation. Estimated residual value of the playground is 14.000. The 18,000 cost savings from the yearly maintenance of the old playground are already included in the operating profit calculations. Year Expected Annual operating profit 40,000 60,000 75,000 40,000 a. Calculate the ARR b. Calculate the PP C. Calculate the NPV d. Calculate the IRR 2. Based on your calculations above, is the option "replace it with similar" a good option? Yes or no and why

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