Darn Co has undertaken market research at a cost of $$200,000$ in order to forecast the

future cash flows of an investment project with an expected life of four years, as follows:

These forecast cash flows are before taking account of general inflation of $4\mathrm{.}7\%$ per year.

The capital cost of the investment project, payable at the start of the first year, will be

$$2,000,000.$ The investment project will have zero scrap value at the end of the fourth year.

The level of working capital investment at the start of each year is expected to be $10\%$ of

the sales revenue in that year. Tax allowable depreciation would be available on the capital

cost of the investment project on a $25\%$ reducing balance basis.

Darn Co pays tax on profits at an annual rate of $30\%$ per year, with tax being paid one year

in arrears. Darn Co has a nominal $($money terms$)$ after tax cost of capital of $12\%$ per year.

$($i$)$ Calculate the net present value of the investment project in nominal terms and

comment on its financial acceptability. $(15$ marks$)$

$($ii$)$ Explain ways in which the directors of Darn Co can be encouraged to achieve the

objective of maximisation of shareholder wealth. $(5$ marks$)$