NPV calculation and taxation Data Tilsley Ltd manufactures motor vehicle com- ponents. It is considering introducing a new product. Helen Foster, the production director, has already prepared the following projections for this proposal:

Helen Foster has recommended to the board that the project is not worthwhile because the cumula- tive after tax profit over the four years is less than the capital cost of the project. As an assistant accountant at the company you have been asked by Philip Knowles, the chief accountant, to carry out a full financial appraisal of the proposal. He does not agree with Helen

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Year 1 2 3 (000) (000) (000) (000) Sales Direct materials 8750 12250 13300 14350 1340 1875 2250 2625 Direct labour 2675 3750 4500 5250 Direct overheads 185 250 250 250 Depreciation 2500 2500 2500 2500 Interest 1012 1012 1012 1012 Profit before tax 1038 2863 2788 2713 Corporation tax @ 30% 311 859 836 814 Profit after tax 727 2004 1952 1899