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Coleman pic is considering an investment proposal for recycling waste production (3) materials into a product, which can be sold to the packaging industry. The company's The process will require the purchase of additional materials which are included as cost of sales in the company accountant's forecast. The project commenced accountant has rejected the project on the basis that it results in a forecast loss of with no opening stock, but the forecast includes the following projected closing $890,000 over its expected five-year life. The company's board of directors are stocks of materials (in (000s) at 31" December: concerned about the carbon footprint of the company and are looking for ways to improve its environmental impact and have agreed that a maximum loss of half a million pounds over a five year period is acceptable. They have requested you to re- 2009 2010 2011 2012 2013 examine the financial consequences of the product. 100 200 150 50 0 You are provided with the following financial information about the project: The materials needed for the year will be purchased and paid for on the first day of the year. (1) The accountant's forecast is as follows based on the project commencing on 1" January 2009. (4) On 1" January 2009 the company will purchase and pay for special recycling machinery. The scrap value at 31" December 2013 is estimated at $50,000. Five year forecast profit and loss account for years ending on 31 December Coleman ple uses the straight-line method of depreciation which results in the charge of $320,000 per annum. 2009 2010 2011 2012 2013 1000 to00 (5) 80% of the overhead charge is an allocation of existing company fixed overheads Sales 1,300 2,000 2,200 2,200 2,200 and 20% represents the overheads incrementally incurred on the new recycling Less: Cost of sales 1,100 1,300 1,450 1.500 1,500 project. Gross profit 200 700 750 700 700 320 (6) Less: Depreciation 320 320 320 320 In August 2008, the company spent $20,000 on commissioning a report 175 195 205 investigating the environmental impact of its waste products. Labour costs 195 195 Overheads 150 325 300 300 300 (7) Each year's labour costs include $55,000 for the environmental manager and Forecast loss (445) (140) (75) (115) (115) 125,000 for a production supervisor. Both are already employed by Green plc. If the project does not proceed, these two employees will remain in their present The following additional information is made available: posts. The remaining labour costs reflect additional workers needed for the process. (2) The recycling process uses up waste materials which have no resale value. At present, disposal of the production waste is arranged by paying an annual fee to a (8) The board of Coleman wish you to use the discounted cash flow method for local waste disposal company. If the project is undertaken, these costs will no project appraisal and the discount rate to be used for this project is 12% per year. longer be incurred. The yearly estimated cost of waste disposal (in 1000s) is as Assume all cash flows occur at the year end, unless otherwise indicated. follows: Based on the above information, decide whether the company should accept the project. Calculate NPV using the cash table. 2009 2010 2011 2012 2013 80 80 80 80 160