Fall River Bikes Company manufactures high$-$performance bikes. The company plans to improve its profits by increasing sales and its market share. They are therefore analysing a project to enter a bike racing team, for a period of four years. If the financial evaluation indicates that project is worthwhile, the project will start immediately. The first year of the project will focus on developing and testing the racing bikes, so they do not expect to generate additional sales from the project during its first year.

The Accounting department has produced the following forecast of cash flows for the project.

Projected Revenue and Costs for the project $($$$)$

Year $1$

$($ Down $390,200)$ Year $2$

Year $3$ Year $4$

Additional sales revenue $--1,020,000970,000992,000$

Operating costs

Materials and components

$($ Direct$)(117,600)(172,000)(172,000)(127,400)$

Salaries and wages $($Direct$)(166,600)(192,080)(196,000)(199,920)$

Depreciation $(70,000)(70,000)(70,000)(70,000)$

Advertising $($fixed$)(30,000)(30,000)(30,000)(30,000)$

Overheads $($fixed$)(20,000)(20,000)(20,000)(20,000)$

The following information is also available:

$1.$ Capital Expenditure on machinery and equipment of $$400,000$ will be incurred on the first day of the project and this equipment is expected to be sold for $$80,000$ on the last day of the fourth year.

$2.$ The expenditures on materials, advertising, and salaries and wages are all directly related to the project and would be avoided should the project not be undertaken.

$3.$ The company spent $$20,000$ on market survey to determine if the market is available for increased output.

$4.$ The depreciation charges on the manufacturing equipment arises from the company$$s use of straight$-$line method of depreciation.

$5.$ All overheads included in the costs are a fair allocation of the head office costs, of which $$6000$ per year are as a result of the project. $($ Just using the $6,000$ rather than the $20,000$ on the table$)$

$6.$ The cost of capital for this type of investment is $10\%$ and the directors set a target accounting rate of return on investment of $15\%(60,000)$ and a payback period of three and half years or less for all projects. $($The goal needed to accept the project, has to be both not one or the other to accept it$.)$

$7.$ The company assumes that all its operating cash flows occur at the end of each year with the exception of the capital expenditure which occurs at the beginning.

Ignore taxation and inflation.

Required

Assume that you are the newly employed graduate from BristolCC who works with the Management Accountant. You are expected to use a range of capital budgeting techniques to carry out an investment appraisal of the project and, based on your results, make recommendations to the company as to whether the project should go ahead. You are asked to present a management report, stating work done, and demonstrating critical evaluation in the robustness of your findings. You can make reference to appropriate theory in investment appraisal, cost of capital and risk.

Instructions

Please ensure that you state any assumptions you have made and that you justify the investment appraisal methods adopted. Include all the detailed workings related to the application of investment appraisal methods in an Appendix. The body of the report should include only the extracts of the final results of these calculations.

Please use APA referencing system, both in$-$text and in the references list for all references. Please ensure that all information used is from an appropriate source. Inappropriate sources of information, such as Wikipedia, tutor$2$you, and other descriptive websites etc. will be unacceptable and result in a loss of marks.