26. - - Adhesion Ltd. is considering the introduction of a new project line - a clear and sticky tape that does not show when attached to paper when photocopied. The building to house the new facility to manufacture the tape is already owned and would if not used for this project be sold for 120,000. The value is assumed to remain constant and to be the same at the end of year 4. The firm will sell the building for 120,000 at the end of year 4. The company are looking at an expansion for just 4 years. Investigating the value of this opportunity is the job of the Strategic Management Group, of which you are the newest member. The rest of your group are busy with really important management jobs, which require lots of travelling and meetings, they do not have the time to work on this. You are given the task to evaluate and appraise the investment. The following data has been made available: Financing will be arranged by increasing the company's debt and equity but the ratio would be maintained. The new debt will also cost the same as the present debt. The discount rate for Adhesion's project appraisal is 17% per annum. New plant and equipment costing 50,000 must be purchased. Cost of a marketing survey (already completed) to establish sales figures is 18,200. The scrap value of the new plant and equipment at the end of year 4 is zero. Working capital of 22,000 is required immediately and this will need to be increased by 1000 at the end of the first, second and third year. It will be returned at the end of the fourth year. Sales, cost of sales and operating expenses are estimated to be 145,000, 50,000 and 35,000 annually. This gives a net operating cash flow of 60,000 per year. Capital allowances on plant and equipment are calculated on a 25% per annum (declining balance basis). Corporation tax rate is 30%. You are required to: (a) calculate all the relevant annual cash flows. [15 marks] (b) calculate the project NPV. [6 marks] make a recommendation, with reasons, whether or not to proceed. What other factors do you need to take into consideration? [4 marks] (c) [Total 25 marks)