PT is a major international computer manufacturing company. It is considering investing in the production of microcomputers.

These computers will be targeted at the education market with the specific aim of encouraging children to learn computer science at an early age.
Sales of the microcomputers are expected to be 100 000 units in Year 1 and then to increase at the rate of 20 percent per annum for the remainder of the project life. The project has a life of five years.
The company’s research and development division has already spent $250 000 in developing the product. A further investment of $10 million in a new manufacturing facility will be required at the beginning of year 1. It is expected that the new manufacturing facility could be sold for cash of $1.5 million, at year 5 prices, at the end of the life of the project. The manufacturing facility will be depreciated over 5 years using the straight line method.
The project will also require an investment of $3 million in working capital at the beginning of the project. The amount of the investment in working capital is expected to increase by the rate of inflation each year.
The selling price of the new product in year 1 will be $45 and the variable cost per unit will be $25. The selling price and the variable cost per unit are expected to increase by the rate of inflation each year.
The microcomputers will be exclusively produced in the new manufacturing facility. The total fixed costs in year 1 will be $2.5 million including depreciation. The fixed costs are expected to increase thereafter by the rate of infation each year.

Taxation
PT’s financial director has provided the following taxation information:
● Tax depreciation: 25 percent per annum of the reducing balance, with a balancing adjustment in the year of disposal.
● Taxation rate: 30 percent of taxable profits. Half of the tax is payable in the year in which it arises, the balance is paid in the following year.

● PT has sufficient taxable profits from other parts of its business to enable the offset of any pre-tax losses.
Other information
● A cost of capital of 12 percent per annum is used to evaluate projects of this type.
● Inflation is expected to be 4 percent per annum throughout the life of the project.

Required:
(a) Evaluate whether PT should go ahead with the investment project. You should use net present value as the basis of your evaluation. Your workings should be rounded to the nearest $000.
(b) Calculate the following for the investment project:
(i) The internal rate of return (IRR);
(ii) The increase or decrease in the cost of capital, expressed as a percentage of the original cost of capital, which would change the decision about whether to accept or reject the project.