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QUESTION FOUR iii. iv. V. Newtown Green Co. currently outsources its container washing activities. The company has become increasingly concerned about the environmental sustainability practices of its supply chain partner. To improve environmental reputation and reduce the use and consumption of limited environmental resources such as natural raw materials, Newtown Green Co. is considering bringing the container washing activity in-house as they have sufficient space on site. vi. Inflation is estimated to be 3% and will affect both sales and costs equally. The organisation's nominal cost of capital is 7% per year. All cash-flows are assumed to occur at the end of the year except the initial capital cost and working capital. EITHER: The value of working capital expected to be released back to the projects cash flows at the end of year 4 is equal to the opening working capital. There will be no other terminal value of the investment. OR: The value of working capital expected to be released back to the projects cash flows at the end of year 4 is estimated to be 10,000. There will be no other terminal value of the investment. vii. Discount Factors Year 1 Year 2 Year 3 Year 4 Year 5 Discount Rate 3% 0.9709 0.9426 0.9151 0.8885 0.8626 This project requires an initial capital investment of 210,000 The investment is expected to save money immediately and following marketing and publicity, it is forecasted to help attract new customers in year two. The asset is expected to have a useful life of 4 years, at the end of which it will be sold for scrap and the prudently estimated proceeds of 5,000 donated to a Conservation International charity. Cash flow projections have been forecasted by the Newtown Green Co. Management Accounting Team: Discount Rate 7% 0.9346 0.8734 0.8163 0.7629 0.7130 Discount Rate 20% 0.8333 0.6944 0.5787 0.4823 0.4019 Required: a) Calculate the Net Present Value for the proposed project adjusting for taxation and inflation. (35 marks) Year 0 Year 1 Year 2 Year 3 Year 4 Non Current Asset 210,000 Working Capital 25,000 Forecasted Savings 60,000 65,000 70,000 70,000 Forecasted New Sales 8,000 20,000 25,000 Forecasted Costs 22,000 20,000 18,000 18,000 Depreciation Costs 52,500 52,500 52,500 52,500 Additional information: i. ii. The firm pays tax at 20%. Tax is payable/receivable one year in arrears. Writing-Down Allowances are available on the initial investment at a rate of 18% (reducing balance method)