Nutcracker Ltd has found it difficult to source sufficient films to maintain profitability. Due to this it has decided to invest in producing films in its own right. The company faces uncertainty as to the potential success/failure rate of independently produced films. In order to gain the expertise for this venture, the company intends to purchase an existing filmmaking concern at a cost of Kes 500,000.00. The company believes that the proposed film production business will be profitable. Using data collected from the existing distribution business and discussions with industry experts, they have produced cost and revenue forecasts for the five years of operation of the proposed investment. The company aims to complete the production of three films per year. The after tax cost of capital for the company is 15%. Year 1 sales for the new business are uncertain, but expected to be in the range Kes 3- 8 Million. Probability estimates for different values are as follows:

Sales in Million (Kes)	Probability
3	0.2
6	0.4
7	0.3
8	0.1

Sales are expected to grow at an annual rate of 5.5%.

Forecast of costs related to the new business are as follows:

COST TYPE	KES 000
Purchase of film making company	500
Annual legal and professional costs	30
Annual lease rental (Office equipment)	15
Studio and set hire (per film)	210
Camera/Specialist equipment hire (per film)	30
Technical staff wages (per film)	530
Screenplay (per film)	60
Actors salaries (per film)	750
Costumes and wardrobe hire	50
Set design and painting (per film)	160
Annual non-production staff wages	70

Additional information

a) No capital allowances are available.

b)Tax is at 30% and payable one year in arrears.

c) Staff wages (technical and non-production staff) and actors salaries are expected to rise by 8% per annum.

d) Studio hire costs will be subject to an increase of 25% in year 3.

e) Screenplay costs per film are expected to rise by 20% p.a. due to shortage of skilled writers.

f) The new business will occupy office accommodation which has to date been let out for an annual rent of Kes 30,000.00.

g) A market research survey into the potential for the film production business cost Kes 30,000.00

What is the Net Present Value of the project? (5 Marks)

Graphically illustrate the Internal Rate of Return for this project. (3 Marks)

Carry out a sensitivity analysis using scenario manager to show the impact of 1% increase sales growth and discount rates, 1% increase in part (c), (d) and (e).