[25 MARKS] QUESTION 2 In early November 2020, Rapid Investment Ltd considered manufacturing a new product called Spike, which will span over three years. Until then, N\$5 75000 has been spent researching the product. The Finance Director is very cautious of economic cycles and how they will affect sales, he has therefore factored in the uncertainty by incorporating various scenarios and associated probabilities. There is a 40% probability that sales will be 100000 units, a 30% probability that sales will be 130000 units and a 30% probability that sales will hit 150,000 units. The company will spend N\$1 500000 on pre-launch advertising in the first year. Thereafter, it will drop to half, i.e., N $750000 for the remaining years of the project. The specialised production equipment will cost N\$9 500000 . The estimated working capital of N\$2. 500000 will be required at the start of the project. The planned selling price is N $249, and variable manufacturing and distribution costs are expected to be N\$122. Fixed admin and space costs at the commencement of the project will be N\$ 6000000 throughout the project. The project will be disposed of for N\$2 000 000 at the end of its economic life. Inflation A general inflation rate of 4% per annum is expected to apply to all revenues and costs throughout the project's life, starting in year 1 , excluding fixed admin and space costs and working capital. Other information The company uses Net Present Value (NPV) based on the expected cash flow values when evaluating projects of this type. The company has a money-cost capital of 14% per annum. The company's Financial Director has provided the following taxation information: - The initial investment will qualify for tax wear \& tear at 33.3% for three years on the reducing balance per annum with a balancing adjustment in the year of disposal. - The first deduction for tax wear \& tear will be made against the profits from year 1. - Taxation rate: 32% of taxable profits. Half of the tax is payable in the year in which it arises, and the balance is payable in the following year. - All cash flows apart from the initial investment of N\$9500 000 should be assumed to occur at the end of the year