A solar panel production firm Soleil SA, is considering an investment in new solar production technology. The new investment would require initial funding of £4 million today and further expenditure on manufacture of £1 million in each of the years 6 and 7. The net cash inflow for the years 1 to 4 is £2.34 million per year. Some equipment could be sold at the end of year 5 when the production ends and together with the cash flows from operation would produce a net cash flow of £4.85 million.
Evaluate the investment using four investment appraisal criteria. The required rate of return of Soleil SA is 12 per cent and Soleil has been known to use a payback period of 2 years in the past. However, the firm’s managers believe that this payback period may be too short.