Advanced. The following data relate to both questions

(a) and (b). A company is considering investing in a manufacturing project that would have a three-year life span. The investment would involve an immediate cash outflow of £50000 and have a zero residual value. In each of the three years, 4000 units would be produced and sold. The contribution per unit, based on current prices, is £5. The company has an annual cost of capital of 8 per cent. It is expected that the inflation rate will be 3 per cent in each of the next three years.

(a) The net present value of the project (to the nearest £500) is:

(a) £4500

(b) £5000

(c) £5500

(d) £6000

(e) £6500

(b) If the annual inflation rate is now projected to be 4 per cent, the maximum monetary cost of capital for this project to remain viable, is (to the nearest 0.5 per cent):

(a) 13.0%

(b) 13.5%

(c) 14.0%

(d) 14.5%

(e) 15.0%

(3 marks)

(2 marks)

a0 CIMA Management Accounting - Decision Making