HOVID PLC, a software company, has developed a new game, Vista, which it plans to launch in the near future. Sales of the new game are expected to be very strong, following a favourable review by a popular PC magazine. HOVID PLC has been informed that the review will give the game a Best Buy recommendation. Sales volumes, production volumes and selling prices for Vista over its four-year life are expected to be as follows: Year 1 2 3 4 Sales and production (games) 100,000 180,000 160,000 80,000 Selling price (RM per game) RM25 RM24 RM23 RM22 Financial information on Vista cost of production is as follows: Direct material cost RM6.40 per game Other variable production cost RM7.50 per game Fixed costs RM600,000 per year Advertising costs to stimulate demand are expected to be RM350,000 in the first year of production and RM100,000 in the second year of production. No advertising costs are expected in the third and fourth years of production. Vista will be produced on a new production machine costing RM800,000. It will cost RM80,000 to modify it for special use by the firm and an additional RM20,000 to install the machine. Government legislation allows HOVID PLC to claim capital allowances will be on a straight-line basis over four years. Inflationary rate of 4% on direct material cost and 5% on other variable production cost. HOVID PLC pays tax on profit at a rate of 26% per year and tax liabilities are settled in the year in which they arise. HOVID PLC uses an after-tax discount rate of 11% when appraising new capital investments. Ignore inflation. Required: a. Calculate the net present value of the proposed investment and comment on your findings. (19 Marks) b. Operating cash flows rather than operating profit formed the basis for capital budgeting decisions. Briefly explain THREE (3) types of costs that need to be considered in determining incremental cash flows