per cent. In addition, the purchase of the new equipment will enable us to reduce our inventories level immediately by £130,000. In view of these facts. I recommend purchase of the new equipment.

The business has a cost of capital of 12 per cent.

Ignore taxation.

Required:

(a) Prepare a statement of the incremental cash flows arising from the purchase of the new equipment.

(b) Calculate the net present value of the proposed purchase of new equipment.

(c) State, with reasons, whether the business should purchase the new equipment.

(d) Explain why cash flow forecasts are used rather than profit forecasts to assess the viability of proposed capital expenditure projects.