Self-test Walter & Co. has developed a new product, X2X, at a total cost of £1,000,000.

The product is expected to have a four-year life.

The following are estimated revenues and costs for the product for the next four years:

Sales Costs 2010 £1,500,000 £1,000,000 2011 £2,000,000 £1,000,000 2012 £2,500,000 £1,120,000 2013 £3,000,000 £1,500,000 X2X will require an additional £2,000,000 investment in additional production machinery. The cost of capital to the company is 10 per cent.

Sales revenues are expected to increase by 5 per cent above the estimates, while costs will increase by 3 per cent. All these increases will become effective from 2011.

You are required to:

(a) calculate the revised budgets for sales and costs for each year; and

(b) calculate the NPV of the project.