AZIZ plc produces wind turbines and are considering buying supplementary equipment that will decrease manpower needs to produce a unit from 5 manhours to 2 manhours. The main machinery has 3 more periods of useful life. If the supplementary equipment is purchased, the existing (main) machine will not be sold at a scrap value of $10,000.

The production units are estimated depending on the state of the green industry, as follows:

IndustryPeriod 1Period 2Period 3

Weak (probability 70%)2,000 units3,000 units2,500 units

Strong (probability 30%)8,667 units9,667 units14,167 units

The employee hourly rate for the coming period is 7.00, rising in period 2 and period 3 to 8.00 and 9.00 respectively.

The supplementary equipment has a capital cost of 300,000 with an estimated residual value at the end of period 3 of 60,000. Capital allowances are at 25% on a reducing balance basis.

The company pays corporation tax at a rate of 30% per period. The authorities will provide a one-off cash grant of $5,000 at the end of the first year.

The company assesses projects of this type using a discount rate of 5% per period.

Any difference between the written down value and proceeds from the sale may be claimed as a tax credit. Taxes are considered one period in arrears.

Required:

a)Calculate the annual cost savings for periods 1, 2 and 3.

b)Calculate the taxable profits for periods 1, 2 and 3.

c)Calculate the total cash flows for each period.

d)Calculate the expected net present value of the project suggesting whether the

company should invest in the supplementary equipment.