1.Global Fox plc, a computer manufacturing company, is considering investing in a four-year investment project. The company has already spent 5 million on research, but this project will require the purchase of equipment costing 800,000 with the expected life of four years.

The company's policy is to depreciate fixed assets on the straight-line basis over their estimated useful economic lives. It is expected that that the new equipment will be disposed of for estimated proceeds of 120,000 at the end of the life of the project.

The profit before interest and tax from the project is expected to be 170,000 in Year 1 and then to increase at the rate of 4% per annum for the remainder of the project life.

Global Fox plc has sufficient taxable profits from other parts of its business to enable the offset of any pre-tax losses on this project. The after-tax cost of capital of 14% is used to evaluate projects of this type.

The taxation information is as follows:

Taxation rate: 30% one year in arrears

Tax depreciation: 25% per annum of the reducing balance, with a balancing adjustment in the year of disposal. The first claim for an allowance would be made against Year 1 profits.

It is anticipated that 30,000 per year will be spent at the end of year 2 on maintenance and 40,000 per year will be paid at the beginning of years 3 and 4 on major technical improvements. The initial outlay would be paid at the start of the project and remaining cash flows can be assumed to occur at the end of the relevant year.

Required:

(i)Calculate the Net Present Value (NPV) of the project. You should round your figures to the nearest .

(ii)Recommend whether Global Fox plc should go ahead with the investment project.

(iii)Measure the sensitivity of the project to changes in initial investment.

(iv)Compare and contrast the terms 'hard' and 'soft' capital rationing.