Your company is considering the following capital investment in additional plant and equipment. The additional plant and equipment will generate revenues of $1,200,000 per year for as long as you maintain it, increasing by $40,000 each year after the first year. The maintenance cost will start at $350,000 per year and increase by $20,000 each year, after the first year. The plant can be built and will become operational immediately. At the end of eight years, the plant and equipment will be obsolete. Assume that all revenue and maintenance costs occur at the end of the year. The plant and equipment will require an investment of $4,800,000. The discount rate is 9.5 %. Ignore taxation.
1. Calculate the net present value of the capital investment.
2. Calculate the payback period of the capital investment.
3. Using the results in Q2.1 and 2.2, make a recommendation as to whether the capital investment should go ahead or not. Explain your recommendation. [100 to 150 words]
4. Critically evaluate the use of net present value and payback as investment appraisal techniques. [150 to 200 words]