Zannel plc is considering a new project to produce a revolutionary surveillance device. The initial capital costs of £300,000 will be paid immediately. The project is expected to last five years. The sales director estimates that revenue in year one is expected to be £200,000 with a growth rate of ten percent per year. The gross profit is expected to be sixty percent for the duration of the project. The company’s policy is to use the straight-line depreciation method for the new project’s asset over five years. At the end of this period, the asset will be scrapped. Assume that the disposal will not incur any cost nor generate any income. Fixed overheads including depreciation for year one is forecast at £110,000. Fixed overheads excluding depreciation are to be increased at a compound rate of five percent per year. Capital allowances are to be taken at 25% of the net book value at the start of the year. The marginal tax rate is twenty percent. Taxes are considered one year in arrears. The cost of capital for the company’s existing projects is ten percent, which the sales director suggests 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 to six. c) Calculate the Net Present Value of the project and advise if the firm should proceed with the new investment Note: To show all workings with accompanying explanations
Zannel plc is considering a new project to produce a revolutionary surveillance device. The
initial capital costs of £300,000 will be paid immediately.
The project is expected to last five years. The sales director estimates that revenue in year
one is expected to be £200,000 with a growth rate of ten percent per year. The gross profit
is expected to be sixty percent for the duration of the project.
The company’s policy is to use the
asset over five years. At the end of this period, the asset will be scrapped. Assume that the
disposal will not incur any cost nor generate any income.
Fixed
overheads excluding depreciation are to be increased at a compound rate of five percent
per year. Capital allowances are to be taken at 25% of the net book value at the start of the
year.
The marginal tax rate is twenty percent. Taxes are considered one year in arrears. The cost
of capital for the company’s existing projects is ten percent, which the sales director
suggests to adopt in assessing the new project.
Required:
a) Calculate the taxable profits for years one to five.
b) Calculate the expected net
c) Calculate the
with the new investment
Note: To show all workings with accompanying explanations
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