Answer Happy

Zannel plc is considering a new project to produce arevolutionary surveillance device. Theinitial capital costs of £300,000 will be paid immediately.The project is expected to last five years. The sales directorestimates that revenue in yearone is expected to be £200,000 with a growth rate of ten percentper year. The gross profitis expected to be sixty percent for the duration of theproject.The company’s policy is to use the straight-line depreciationmethod for the new project’sasset over five years. At the end of this period, the asset will bescrapped. Assume that thedisposal will not incur any cost nor generate any income.Fixed overheads including depreciation for year one is forecast at£110,000. Fixedoverheads excluding depreciation are to be increased at a compoundrate of five percentper year. Capital allowances are to be taken at 25% of the net bookvalue at the start of theyear.The marginal tax rate is twenty percent. Taxes are considered oneyear in arrears. The costof capital for the company’s existing projects is ten percent,which the sales directorsuggests to adopt in assessing the new project.Required:a) Calculate the taxable profits for years one to five.b) Calculate the expected net cash flows for years zero tosix.c) Calculate the Net Present Value of the project and advise if thefirm should proceedwith the new investment
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