CAPITAL BUDGETING (20 MARKS) Atlantic Electronics Limited (Atlantic) has been offered a fixed price contract for the manufacture of twelve specialised robotic workstations at a selling price of R102 732 each. Four robotic workstations will be manufactured and sold annually. The contract will be valid for three years with effect from 1 January 2012. If the contract is accepted, additional working capital to the amount of R200 000 will be required of which 80% will be recovered at the end of the contract. The following estimates concerning equipment, labour, overheads and material have been made for the contract: Equipment Special equipment will have to be purchased and will be paid for on 1 January 2012. The amount payable is R350 000 and the equipment can be sold on 31 December 2014 for R50 000. Equipment is depreciated over four years. Labour Each workstation requires 800 hours of skilled labour and 1 600 hours of unskilled labour at tariffs of R15 and R10 per hour respectively. It is expected that the necessary skilled labour will not be available during the first year. Skilled labour will therefore have to be drawn from existing work which produces a contribution of R20 per hour, net of labour costs. If the contract is accepted a technical manager who was to have been retrenched will be retained for a further 3 years. His current salary is R180 000 per annum and in terms of his retrenchment he would have received a lump sum of R300 000 on 1 January 2012 and a pension of R120 000 per annum. These terms will still apply at his retrenchment in three years" time. Overheads According to the preliminary budgets (before taking the new contract into account) overheads will be allocated at R41 per skilled labour hour as detailed below: R Fixed overheads Variable overheads 23.50 17.50 41.00 Material Each workstation requires 20 units of material X. The estimated purchase price for material X is R850 per unit. In addition to material X, each workstation also requires ten integrated circuits (IC"s) which will have to be purchased at a cost of R960 per integrated circuit. Additional information Atlantic's cost of capital is 16% before tax. REQUIRED: 1. Calculate the net present value of the contract being offered to Atlantic Electronics Limited and recommend, based on your result, whether the contract should be accepted. Note: Ignore taxation