Question 1 ABC Co is thinking of buying a new machine to produce a product X The machine is expected to cost $1 million. Production and sales of product X are forccast to be as follows: 1 Year Production and sales (units/year) 2 53,000 3 75,000 4 36.000 35,000 The selling price of product X (in current price terms) will be $30 per unit, while the variable cost of the product (in current price terms) will be $15 per unit. Selling price inflation is expected to be 5% per year and variable cost inflation is expected to be also 5% per year. No increase in existing fixed costs is expected since ABC Co has spare capacity in both space and labour terms. I Producing and selling product X will call for increased investment in working capital Analysis of historical levels of working capital within ABC Co indicates that at the start of each year, investment in working capital for product X will need to be 7% of sales revenue for that year. ABC Co pays tax of 30% per year in the year in which the taxable profit occurs. Liability to tax is reduced by tax allowable depreciation on machinery (tax-allowable depreciation), which ABC Co can claim on a straight-line basis over the four-year life of the proposed investment. The new machine is expected to have no scrap value at the end of the four-year period. ABC Co uses a nominal (money terms) after tax cost of capital of 12% for investment appraisal purposes. Required: a) Calculate the net present value of the proposed investment in product X. (16 marks) b) Advise on the acceptability of the proposed investment in product and discuss the limitations of the evaluation you have carried out. (4 marks)