A company is considering an investment of £1.4 million in a project that has a seven-year life. The company has estimated its discount rate at 12%. Details of the sales and costs arising from this project are as follows:

Note that the annual overhead includes £200,000 per year depreciation on the asset. It also includes apportioned fixed overheads of a further £50,000 per year.

(a) Calculate the net present value of the project. Provide a commentary on the discounting process and on the net present value that you have calculated.

(b) Carry out a sensitivity anlaysis on five variables of this project, including the life of the project and the discount rate. Identify what you consider to be the most critical variable and advise management what they should do, if anything, before adopting this project.

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Costs Sales volume: Sales price: Direct materials (4 kg at 0.40 per kg) Direct labour (0.1 hour at 8 per hour) Overhead 250,000 units per annum 4 per unit 1.60 per unit 0.80 per unit 330,000 per annum