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Computech Company is a computer peripheral manufacturing company. It is considering an investment of $760,000 in equipment for the production of a new product developed by its research and development department.

The equipment has an expected life of four years. Sales are expected to be 50,000 units per year at a price of $80 per unit. Fixed costs excluding depreciation of the equipment are $1,700,000 per year, and variable costs are $31 per unit. The equipment will be depreciated over four years using the straight-line method with a zero salvage value. Working capital requirements are assumed to be 5% of annual sales. The company has spent a total of$250,000 on the research and development of this product in the past years.

The equipment needs to be operated by two experienced technicians. The management will transfer two senior technicians from another production line to fill these positions. The vacancies they left behind will be filled by two new technician recruits in junior grade. The salary of each of the junior technicians is $180,000 per year.

The company pays income tax at the rate of 20%. The market cost of capital for the project is 12% per year.

Required:

a) Determine the relevant cash flows for the project. (15 marks)

b) Advise A&B Company whether it should proceed with the project based on (i) the net present value, (ii) internal rate of return, (iii) profitability index of the project, respectively. (8 marks)

c) The management of the company has evaluated the feasibility of another new project. The following is the information about that project.

Initial Investment	$760,000
Annual cash inflows
Year 1	$500,000
Year 2	$350,000
Year 3	$350,000

The internal rate of return of the project is 29.1%.

The company can only select one project between the project in part (a) and the project in this part to proceed.

Compare the internal rate of return of this project with that of the project in part (a). Discuss whether the company should base on the comparison of internal rates of return to make its selection decision. Explain your answer. (3 marks)

d) Use one investment evaluation technique other than internal rate of return to help the management of the company to select appropriately between the project in part (a) and the project in part (c). (6 marks)

e) If the company decides to proceed with the project in part (a), it will need to issue new debts to finance the new project and this new debt's interest payment is expected to be $500,000 per year. Advise the company whether they should consider this interest payment when calculating the project's net present value. (3 marks)

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