Granger, a division of a company, is considering a five-year investment opportunity which will require building a new factory which will cost £3.2 million and which will have scrap value of £0.5m. Granger has undertaken a survey to determine whether land it currently owns will be suitable land on which to build the factory. The survey cost £150,000. The land currently contains a building which will have to be demolished at a cost of £230,000 if the company decides to go ahead with the project. The current building is rented out on a five-year contract by Granger to Black, another division of the same company, at an annual rent of £110,000. If Granger goes ahead with the project, Black will rent a building from another company at the same cost. If Granger builds the factory it expects sales of £1.1 million next year and expects the sales receipts to increase by 5% per year after the first year due to inflation. This estimate of sales is the result of market research which cost Granger £140,000. The sales of other products produced by Granger will not be affected by the new product, but sales of the Black division are expected to fall by £25,000 per year. These will not be affected by inflation. The total running costs of production are estimated to be £280,000 in the first year. This figure is expected to increase by 7% per year after the first year due to inflation. Granger depreciates building costs on a straight-line basis. There is no taxation. The current real rate of return on projects of this type is 9% and the current inflation rate is 6%. Granger is considering the following statements about which of the figures should be included in the investment appraisal calculations. Which of the following statements is/are correct? I. The cost of the survey (£150,000), the cost of the market research (£140,000) and the foregone rent (£110,000 per year) should not be included in the calculations. II. The cost of demolition (£230,000) should be included in the calculations, but the lost sales to Black (£25,000 per year) should not be included because they are not sales of Granger. III. Since the factory will be depreciated over five years, a figure of £540,000 per year should be included in the cash flow figures. IV. Granger does not need to take account of inflation to calculate annual cash flows as long as it uses the real rate of return. a None of the statements are correct b I and III only c II and III only d IV only e I and IV only