The Cottage Moat Hotel group

The Cottage Moat Hotel group is planning to update its I.T. systems.

It has identified the most appropriate computer system for its needs which will cost £35m.

The additional cost for system support will be £3.5m per annum and will be outsourced.

The introduction of the system will result in the closure of the group's own technical department. This will save £15m per annum but there will be immediate redundancy costs of £4m.

An additional £1.5m training costs will be incurred during the first year.

There will also be annual savings of £700,000 in other administrative costs.

Certain items of office and I.T. equipment will then be redundant and will immediately be sold for £2m.

The new I.T. equipment will have a five year life and will have no trade in value at the end of this period. Depreciation will be provided at 20% straight line.

The Company's cost of capital is 15%.

Required

(a) Calculate:

(i) The payback period for the project
(ii) The Net Present Value (NPV)

(b) Advise the group on whether they should go ahead with the project. In particular, comment on the usefulness or otherwise of the techniques used in (a) above.