Amore Ltd has spent $20 000 researching the prospects for a new range of products. If it were decided that production is to go ahead an investment of $240 000 in capital equipment on 1 January 2017 would be required. The accounts department has produced budgeted profit and loss statements for each of the next five years for the project. At the end of the fifth year the capital investment will be sold and production will cease. The capital equipment is expected to be sold for scrap on 31 december 2021 for $40 000.

	Year End
	31 Dec 2017	31 dec 2018	31 dec 2019	31 dec 2020	31 dec 2021
Sales ($)	400 000	400 000	400 000	320 000	200 000
Materials ($)	240 000	240 000	240 000	192 000	120 000
Other variable costs ($)	40 000	40 000	40 000	32 000	20 000
Overheads ($)	20 000	20 000	24 000	24 000	24 000
Depreciation ($)	40 000	40 000	40 000	40 000	40 000
Net Profit/Loss ($)	60 000	60 000	56 000	32 000	-4 000

When production is started it will be necessary to raise material stock levels by $30 000 and other working capital by $20 000. Both the additional stock and other working capital increases will be released at the end of the project. Customers recieve one year's credit from the company. The overhead figures in the budgeted accounts have two elements - 60% is due to a reallocation of existing overheads, 40% is directly incurred because of the take-up of the project. For the purposes of this appraisal you may regards all receipts and payments as occuring at the year end to which they relate, unless otherwise stated. The company's cost of capital is 12%. Assume no inflation or tax.

1.1 Use the net present value method of project appraisal to advise the company on whether to go ahead with the proposed project. (10 marks)

1.2 Explain to a mangement team unfamiliar with discounted cash flow appraisal thecniques the significance and value of NPV method. (10 Marks)