Question 2 TEVAL Ltd TEVAL Ltd. ("TEVAL") is considering setting up a new project. The company commissioned a comprehensive report at a cost of /f50.000 which determined the relevant project details below. The cost of the required investrment in equipment and furniture is estimated at /E570,000. This equipment and furniture is not expected to have any salvage value at the end of the project. Net working capital for the project amounting to EIF220,000 will be required immediately. The site and the building for the project will be leased over the projects life for a fixed period of ten years at an annual rental of _250,000. payable in arrears. Annual sales are cstimated at eic1 ,750,000, and the expected level of contribution margin is 40% of saics. Fixed operating costs for the new project are expected to be {230,000 per year, excluding accounting depreciation. TEVAL pays taxes at a rate of 25% of taxable profits in the same year the liability arises. The company has sufficient taxable profits on its other activities to absorb any tax losses arising from this new project. The relevant cost of capital for this new project is 15%. (Note: Capital allowances should be ignored). Requirement Part A (i) Prepare a statement of after-tax cash flows attributable to the new project being considered by TEVAL. Where appropriate, you should identify the reason(s) for the exclusion of a particular cost or revenue items. 6 Marks (ii) Using the Net Present Value (NPV) method, evaluate the proposal as outlined above and advise TEVAL as to whether they should proceed or not, clearly stating the basis for your decision. 5 Marks Part B Calculate the Internal Rate of Return (IRR) for this investment opportunity and explain what it means in the context of this project. 4 Marks Part C Compare and contrast the NPV and the Payback method as investment appraisal evaluation methods. 5 Marks Total 20 Marks