11 Investment Appraisal—General. You are the chief accountant of Deighton plc, which manufactures a wide range of building and plumbing fittings. It has recently taken over a smaller unquoted competitor, Linton Ltd. Deighton is currently checking through various documents at Linton’s head office, including a number of investment appraisals. One of these, a recently rejected application involving an outlay on equipment of £900,000, is reproduced below. It was rejected because it failed to offer Linton’s target return on investment of 25 per cent (average profit-toinitial investment outlay). Closer inspection reveals several errors in the appraisal.

Item (£000) 0 1 2 3 4 Sales 1,400 1,600 1,800 1,000 Materials (400) (450) (500) (250)
Direct labour (400) (450) (500) (250)
Overheads (100) (100) (100) (100)
Interest (120) (120) (120) (120)
Depreciation (225) (225) (225) (225)
Profit pre-tax 155 255 355 55 Tax at 33% (51) (84) (117) (18)
Post-tax profit 104 171 238 37 Outlay Stock (100)
Equipment (900)
Market research (200)
(1,200)