A company is appraising a new project which cost an initial investment of $320,000 for its plant and machinery. The plant and equipment is expected to run for 4 years and scrap value at the end of its life is estimated to be 20% of the cost.

The expected units of sales and productions are as follows:

Year

1

2

3

4

Sales

8,000

7,000

4,000

3,000

Production

9,000

6,000

5,000

2,000

The selling price will be $35 with 60% probability or it is expected to be $45. The variable production cost per unit includes $7 for materials, $6 for labour and $8 for overheads. The labour cost is subject to an increase of $2 from third year. The fixed cost for the first year is $10,000 and it is estimated to increase by $3,000 every year.

The company can claim tax allowable depreciation on the investment at on 25% reducing balance basis. Taxation is to be paid one year in arrears at an annual rate of 30% and the after-tax weighted average cost of capital of the company is 10% per year.

Required

(a)Calculate the net present value of the new investment project and comment on its financial viability.

(12 marks)