9 NPV Capital Budgeting Culdesac NV has developed a design for new wireless noise-reducing earphones and is considering whether it should replace its existing wired earphones, whose popularity has decreased in the last year. The company publishes its financial accounts at 31 December, and today is 1 January.

As the financial manager of the business you have been provided with the following information:

• The machinery required to produce the station will cost €100 million today. The project is likely to become obsolete after five years, at which time the machinery will have an expected resale value of €30 million.

• The company has already spent €20 million on market research and development of the prototype for the product.

• Production will take place on premises currently owned but rented out by the company for €35 million per annum.

• The annual sales volume over the life of the project is expected to be 100,000; 100,000; 200,000;

300,000; and 200,000 in years 1–5, respectively. The selling price per unit will be €300 throughout the life of the project.

• The variable costs per unit produced are expected to be as follows:

Materials €90 per machine Wages €30 per machine Others €30 per machine

• The firm’s fixed costs are currently €50 million, and are expected to increase to €55 million as a direct result of this project.
• The project’s working capital requirements for the project are as follows:
Raw materials one-tenth of annual material requirements Finished goods one-tenth of annual total costs of production Debtors one-fifth of annual sales Creditors one-fifth of annual material requirements.
• Tax depreciation on the purchase of the machine is allowed at 25 per cent on a reducing balance basis.
• The company pays corporation tax at 35 per cent, which is payable one year in arrears.
• The opportunity cost of capital for the project is 10 per cent.
Produce a working capital schedule and tax depreciation schedule for the project. Also prepare a change in income statement and show the change in cash flows. Calculate the project’s NPV. Should the project be accepted?