You should assume that all other cash flows occur at the end of the year to which they relate.

• The development costs of £90,000 have already been spent.

• Overheads have been costed at 50 per cent of direct labour, which is the business’s normal practice. An independent assessment has suggested that incremental overheads are likely to amount to £30,000 a year.

• The business’s cost of capital is 12 per cent.

Required:

(a) Prepare a corrected statement of the incremental cash flows arising from the project. Where you have altered the assistant’s figures you should attach a brief note explaining your alterations.

(b) Calculate:

(1) The project’s payback period.

(2) The project’s net present value as at 31 December Year 0.

(c) Write a memo to the board advising on the acceptance or rejection of the project.

Ignore taxation in your answer.