​​​ Question 1: Capital Expenditure Decision and Investment CriteriaNewton plcThe board of directors of Newton plc has to decide whether or not to invest in a manufacturing plant to produce a new product that has been developed on the basis of research undertaken within the company. The development of the product has been expensive and at a cost of £2.00 million has significantly exceeded the initial budget allocation for the product. One member of the board has argued that the company should not proceed with the investment as it is most unlikely that it will be able to recover what has already been spent on the product.The marketing department has suggested that the product should be sold at £14.00 per unit and it is anticipated that sales in the first year will be about 400,000 units, rising to 600,000 in year two. Sales are expected to remain at this level for the following three years and fall to 300,000 units in year six. It is thought that the product is unlikely to be competitive after six years given the rate of product innovation in the sector, and it will be withdrawn from the market at this stage.To manufacture the product an investment of £9.00 million will be necessary in new production facilities. This expenditure can be written off for tax purposes using a 25 per cent writing down allowance. The re-sale value of the equipment has been estimated to be about £2.50 million at the end of the six year anticipated product life. Use will also be made of some equipment the company already owns. This equipment is now fully depreciated for tax purposes, but would be sold today for £1.20 million. If used in the manufacture of the product its value expected to fall to £0.30 million by the end of year six.The production facility will be located in one of the company's factories that is not being fully utilised. The company has no alternative uses available for this space that is currently being rented out to another manufacturer for £80,000 per annum. The product will be charged £40,000 per annum for the space it utilises through the company's internal budgetary system. The fixed costs associated with the production are expected to be £250,000 per annum. Each product sold by the company is also allocated by the company's accountant an overhead charge of 5 per cent of the revenues it generates to cover head office expenses. The direct manufacturing costs are expected to be £7.00 per unit.The company will need to hold stocks of the final product at the start of each year equivalent to 20 per cent of the sales expected in the next year and also stocks of materials and components equivalent to 20 per cent of the production expected in the next year. The materials and components account for £4.00 per unit out of the £7.00 overall direct cost per unit. The increase in debtors as a result of introducing the product will be offset by the increase in creditors. The company requires a rate of return of 12 per cent on investments of this nature, and the tax rate is 25 per cent.a)Determine the investment's net present value, the internal rate of return, payback period and discounted payback period. All key assumptions should be specified and explained very carefully.(20 marks)b)Interpret the NPV, IRR, payback period and discounted payback period, using the results of your evaluation of Newton's proposed investment to illustrate your answer.Question 2: Valuation of a Company's SharesTake the price earnings ratios for three companies traded on the London Stock Exchange from the data set given in the attached file. These companies are drawn from the FT 100, the hundred largest companies traded on the exchange, and the P/E ratios specified are for the end of each year from 2007 to 2013. The data also gives the P/E ratios for the index.Discuss the factors that might explain the differences in the price earnings ratios of the three companies you have chosen and the changes that have occurred in their price earnings ratios over the six year period. (Choose companies with a range of P/E ratios to give you one with a relatively low value, one with a relatively high value, and another with a middling value.)You should use the insights provided by valuation models on the determinants of the price-earnings ratios in your discussion, but you should also discuss the role of any other factors that might influence the reported values of price-earnings ratios of the companies you have chosen.Whilst you need to gather some information on the companies you choose it is not anticipated that you undertake an in-depth analysis of the companies. It is acceptable to make use of some possible reasons to account for the differences in the price earnings ratios as well as employing the information that you gather on the companies.