Trigger PLC is a manufacturer of computer components and a decision is required on a proposal to invest £1,800,000 on a new machine in order to move into a new market for components. The financial details are as follows:
Initial investment: £1,800,000
Life of project: 10 years Net cash flows:
years 1-6 £500,000 per year years 7-10 £300,000 per year
Residual value £500,000
The company has a target rate of return of 11% and a payback criterion of 4 years.
(a) Calculate the payback period.
(b) Calculate the project's net present value.
(c) Advise the company on whether it should proceed with the project. Provide reasons for your advice.