Link UK produces consumer networking hardware for private homes. Following the increase in home- working, the company is considering the development of a new wireless router. The innovative product will be able to handle more than 200 connected devices at the same time, all doing data intensive tasks such as streaming and gaming at speeds of 1 Gigabit per second. The company has already conducted a feasibility study that cost 250,000 to assess the marketability of the product. Link UK estimates that pre-production engineering and design costs will be 1,500,0000 in Year O. These costs are not to be included in the tax shield. The product will also require specialised software for which the company intends to hire three software engineers for the first year at the cost of 110,000 each per year, including benefits and related costs. New equipment for testing the compatibility of the router with various Wi-Fi connected appliances cost 3m. This will be entirely depreciated using the straight-line method over the life of the project. Sales forecast for this upmarket product are for 70,000 units per year, 70% online and 30% in electronics shops. The router will sell online for 180 and in stores for 225. Production will be outsourced at a cost of 90 per unit. However, Link UK will still need to pay for packaging costs which will amount to 15 per unit. Given the tight competition in this sector, it will be necessary to engage in a marketing campaign on social media and TV for the first two years costing 500,000 per year. The project requires an initial investment in Net Working Capital of 4300,000 in Year O, which will be fully recovered at the end of the project. No other changes in Net Working Capital occur during the life of the project. Given the technological developments in this area the product life is estimated to be only four years. The company pays a yearly 20 per cent corporate tax rate and requires a 8% return for the new project. Link UK is currently selling a less advanced router. Its production was planned to terminate at the end of next year (end of Year 1 of the above project). The router currently sells online for 125 and in stores for 150. Sales are estimated to be 50,000 units per year, 50% online and 50% in stores. Total production, packaging and delivery costs are 80 per unit. If the new project is implemented sales of the less advanced router, both online and in store, will incur a reduction of 40%. All other costs, net working capital and depreciation for this less advanced product will remain the same and should not be taken into account. The required rate of return for the less advanced router project is 6%. REQUIRED (a) Calculate the Net Present Value of the new project clearly showing the formulae you use and your calculations. Table 1: Present value factors To determine the present value of a single payment of 1 received 'n' years from the present Periods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.9901 0.9803 0.9706 0.9610 0.9515 0.9420 0.9327 0.9235 0.9143 0.9053 0.8963 0.8874 0.8787 0.8700 0.8613 0.8528 0.8444 0.8360 0.8277 0.8195 2% 0.9804 0.9612 0.9423 0.9238 0.9057 0.8880 0.8706 0.8535 0.8368 0.8203 0.8043 0.7885 0.7730 0.7579 0.7430 0.7284 0.7142 0.7002 0.6864 0.6730 3% 0.9709 0.9426 0.9151 0.8885 0.8626 0.8375 0.8131 0.7894 0.7664 0.7441 0.7224 0.7014 0.6810 0.6611 0.6419 0.6232 0.6050 0.5874 0.5703 0.5537 4% 0.9615 0.9246 0.8890 0.8548 0.8219 0.7903 0.7599 0.7307 0.7026 0.6756 0.6496 0.6246 0.6006 0.5775 0.5553 0.5339 0.5134 0.4936 0.4746 0.4564 5% 0.9524 0.9070 0.8638 0.8227 0.7835 0.7462 0.7107 0.6768 0.6446 0.6139 0.5847 0.5568 0.5303 0.5051 0.4810 0.4581 0.4363 0.4155 0.3957 0.3769 62 0.9434 0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584 0.5268 0.4970 0.4688 0.4423 0.4173 0.3936 0.3714 0.3503 0.3305 0.3118 7% 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227 0.5820 0.5439 0.5083 0.4751 0.4440 0.4150 0.3878 0.3624 0.3387 0.3166 0.2959 0.2765 0.2584 8% 9% 10% 0.9259 0.9174 0.9091 0.8573 0.8417 0.8264 0.7938 0.7722 0.7513 0.7350 0.7084 0.6830 0.6806 0.6499 0.6209 0.6302 0.5963 0.5645 0.5835 0.5470 0.5132 0.5403 0.5019 0.4665 0.5002 0.4604 0.4241 0.4632 0.4224 0.3855 0.4289 0.3875 0.3505 0.3971 0.3555 0.3186 0.3677 0.3262 0.2897 0.3405 0.2992 0.2633 0.3152 0.2745 0.2394 0.2919 0.2519 0.2176 0.2703 0.2311 0.1978 0.2502 0.2120 0.1799 0.2317 0.1945 0.1635 0.2145 0.1784 0.1486 Table 2: Annuity factors (ordinary annuity) - Cumulative present value factors The table gives the present value of 'n' annual payments of 1 received for the next 'n' years with a constant discount of x% per year. For example, with a discount rate of 8% and with 6 annual payments of 1 the present value is 4.6229 Periods 1% 2% 3% 4% 5% 6% 7% 8% 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 13 12.1337 11.3484 10.6350 9.9856 9.3936 8.8527 8.3577 7.9038 14 13.0037 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 17 15.5623 14.291913.1661 12.1657 11.2741 10.4773 9.7632 9.1216 18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 19 17.2260 15.6785 14.3238 13.1339 12.0853 11.1581 10.3356 9.6036 20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 9% 0.9174 1.7591 2.5313 3.2397 3.8897 4.4859 5.0330 5.5348 5.9952 6.4177 6.8052 7.1607 7.4869 7.7862 8.0607 8.3126 8.5436 8.7556 8.9501 9.1285 10% 0.9091 1.7355 2.4869 3.1699 3.7908 4.3553 4.8684 5.3349 5.7590 6.1446 6.4951 6.8137 7.1034 7.3667 7.6061 7.8237 8.0216 8.2014 8.3649 8.5136 Link UK produces consumer networking hardware for private homes. Following the increase in home- working, the company is considering the development of a new wireless router. The innovative product will be able to handle more than 200 connected devices at the same time, all doing data intensive tasks such as streaming and gaming at speeds of 1 Gigabit per second. The company has already conducted a feasibility study that cost 250,000 to assess the marketability of the product. Link UK estimates that pre-production engineering and design costs will be 1,500,0000 in Year O. These costs are not to be included in the tax shield. The product will also require specialised software for which the company intends to hire three software engineers for the first year at the cost of 110,000 each per year, including benefits and related costs. New equipment for testing the compatibility of the router with various Wi-Fi connected appliances cost 3m. This will be entirely depreciated using the straight-line method over the life of the project. Sales forecast for this upmarket product are for 70,000 units per year, 70% online and 30% in electronics shops. The router will sell online for 180 and in stores for 225. Production will be outsourced at a cost of 90 per unit. However, Link UK will still need to pay for packaging costs which will amount to 15 per unit. Given the tight competition in this sector, it will be necessary to engage in a marketing campaign on social media and TV for the first two years costing 500,000 per year. The project requires an initial investment in Net Working Capital of 4300,000 in Year O, which will be fully recovered at the end of the project. No other changes in Net Working Capital occur during the life of the project. Given the technological developments in this area the product life is estimated to be only four years. The company pays a yearly 20 per cent corporate tax rate and requires a 8% return for the new project. Link UK is currently selling a less advanced router. Its production was planned to terminate at the end of next year (end of Year 1 of the above project). The router currently sells online for 125 and in stores for 150. Sales are estimated to be 50,000 units per year, 50% online and 50% in stores. Total production, packaging and delivery costs are 80 per unit. If the new project is implemented sales of the less advanced router, both online and in store, will incur a reduction of 40%. All other costs, net working capital and depreciation for this less advanced product will remain the same and should not be taken into account. The required rate of return for the less advanced router project is 6%. REQUIRED (a) Calculate the Net Present Value of the new project clearly showing the formulae you use and your calculations. Table 1: Present value factors To determine the present value of a single payment of 1 received 'n' years from the present Periods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.9901 0.9803 0.9706 0.9610 0.9515 0.9420 0.9327 0.9235 0.9143 0.9053 0.8963 0.8874 0.8787 0.8700 0.8613 0.8528 0.8444 0.8360 0.8277 0.8195 2% 0.9804 0.9612 0.9423 0.9238 0.9057 0.8880 0.8706 0.8535 0.8368 0.8203 0.8043 0.7885 0.7730 0.7579 0.7430 0.7284 0.7142 0.7002 0.6864 0.6730 3% 0.9709 0.9426 0.9151 0.8885 0.8626 0.8375 0.8131 0.7894 0.7664 0.7441 0.7224 0.7014 0.6810 0.6611 0.6419 0.6232 0.6050 0.5874 0.5703 0.5537 4% 0.9615 0.9246 0.8890 0.8548 0.8219 0.7903 0.7599 0.7307 0.7026 0.6756 0.6496 0.6246 0.6006 0.5775 0.5553 0.5339 0.5134 0.4936 0.4746 0.4564 5% 0.9524 0.9070 0.8638 0.8227 0.7835 0.7462 0.7107 0.6768 0.6446 0.6139 0.5847 0.5568 0.5303 0.5051 0.4810 0.4581 0.4363 0.4155 0.3957 0.3769 62 0.9434 0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584 0.5268 0.4970 0.4688 0.4423 0.4173 0.3936 0.3714 0.3503 0.3305 0.3118 7% 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227 0.5820 0.5439 0.5083 0.4751 0.4440 0.4150 0.3878 0.3624 0.3387 0.3166 0.2959 0.2765 0.2584 8% 9% 10% 0.9259 0.9174 0.9091 0.8573 0.8417 0.8264 0.7938 0.7722 0.7513 0.7350 0.7084 0.6830 0.6806 0.6499 0.6209 0.6302 0.5963 0.5645 0.5835 0.5470 0.5132 0.5403 0.5019 0.4665 0.5002 0.4604 0.4241 0.4632 0.4224 0.3855 0.4289 0.3875 0.3505 0.3971 0.3555 0.3186 0.3677 0.3262 0.2897 0.3405 0.2992 0.2633 0.3152 0.2745 0.2394 0.2919 0.2519 0.2176 0.2703 0.2311 0.1978 0.2502 0.2120 0.1799 0.2317 0.1945 0.1635 0.2145 0.1784 0.1486 Table 2: Annuity factors (ordinary annuity) - Cumulative present value factors The table gives the present value of 'n' annual payments of 1 received for the next 'n' years with a constant discount of x% per year. For example, with a discount rate of 8% and with 6 annual payments of 1 the present value is 4.6229 Periods 1% 2% 3% 4% 5% 6% 7% 8% 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 13 12.1337 11.3484 10.6350 9.9856 9.3936 8.8527 8.3577 7.9038 14 13.0037 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 17 15.5623 14.291913.1661 12.1657 11.2741 10.4773 9.7632 9.1216 18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 19 17.2260 15.6785 14.3238 13.1339 12.0853 11.1581 10.3356 9.6036 20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 9% 0.9174 1.7591 2.5313 3.2397 3.8897 4.4859 5.0330 5.5348 5.9952 6.4177 6.8052 7.1607 7.4869 7.7862 8.0607 8.3126 8.5436 8.7556 8.9501 9.1285 10% 0.9091 1.7355 2.4869 3.1699 3.7908 4.3553 4.8684 5.3349 5.7590 6.1446 6.4951 6.8137 7.1034 7.3667 7.6061 7.8237 8.0216 8.2014 8.3649 8.5136