1. PV Co, a large stock-exchange-listed company, is evaluating an investment proposal to manufacture Product W33, which has performed well in test marketing trials conducted recently by the companys research and development division. Product W33 will be manufactured using a fully-automated process which would significantly increase noise levels from PV Cos factory. The following information relating to this investment proposal has now been prepared:

Initial investment $2 million

Selling price (current price terms) $20 per unit

Expected selling price inflation 3% per year

Variable operating costs (current price terms) $8 per unit

Fixed operating costs (current price terms) $170,000 per year

Expected operating cost inflation 4% per year

The research and development division has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life-cycle of Product W33

Year 1 2 3 4

Demand (units) 60,000 70,000 120,000 45,000

It is expected that all units of Product W33 produced will be sold, in line with the companys policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of Product W33 is planned to end. For investment appraisal purposes, PV Co uses a nominal (money) discount rate of 10% per year and a target return on capital employed of 30% per year. Ignore taxation.

Required: (a) Calculate the following values for the investment proposal:

(i) Net present value of the investment

1. Evaluate the accuracy of progress monitoring in predicting project success.
2. Judge the appropriateness of using separate accounting modules for project information.
3. Critique the impact of interest capitalization on financial statements.