Salam Ltd Company currently sends out its vehicles for painting to specialist firms. During the last financial year, the number of vehicles painted was 796 at a cost of 224,472. You are considering the possibility of this work being undertaken by the company in a workshop set up for this purpose. The following information relates to the project:

1. The paint shop can be set up in an existing building that has not been used for some years and is estimated to be worth 250,000.
2. Equipment costing 480,000 needs to be purchased with a life expectancy of 6 years. The residual value is estimated as 96,000 at the end of year 6.
3. The annual costs in todays money of the operation are estimated to be:

Rates and maintenance	17,920
Management	21,400
Labour	46,970
Head office costs	25,000

4. Based on the number of vehicles painted last year, the cost of consumable materials and other variable costs is estimated at 30,248 based on the number of vehicles painted last year.
5. Tax will be recoverable in year 2 and payable thereafter as shown below:

Year 2	25,220	Recoverable
Year 3	10,780	Payable
Year 4	16,180	Payable
Year 5	20,230	Payable
Year 6	23,268	Payable
Year 7	46,049	Payable

The head office costs are a re-allocation of existing overheads.

Required:

1. Calculate the following performance indicators relating to the proposal:

1. NPV based on a cost of capital of 12%.
2. IRR.
3. Payback period in both nominal and present-value terms?

Do these indicators suggest that the project should be undertaken?

2. What other considerations should be taken into account by Salam Ltd Company when establishing the new project?

3. Assume that Salam Ltd Company typically adds or subtracts 4 percentage points to the overall cost of capital to adjust for risk. Should the new project be accepted?

4. The companys management is unsure of the reliability of the estimated figures for either the residual value of equipment or the unit variable cost. What is the maximum deviation allowed for the original decision to remain unchanged in each of the independent situations described below? Prove your answer.

1. The residual value of equipment if the change will affect only the residual value of the equipment.
2. The cost of consumable materials and other variable costs if the change will affect only the materials and other variable costs of the vehicles to be painted by the new project.

5. Salam Ltd controller, Mr. Ahmed recently attended a conference at which activity-based costing systems were discussed. He became convinced that such a system would help Salam Ltd management to understand its product costs better. He got top managements approval to design an activity-based costing system, and an ABC project team was performed to discuss how they can benefit from ABC in preparing the capital budget. Write a memo to the team, in no more than 500 words, commenting on the situation companys team has been facing. In your memo explain how an activity-based capital budget differs from a conventional capital budget and describe the impact of activity based costing on capital-budgeting decisions.

Note: use the following format for the memo:

Memo
Date:	.
To:	.
From:	.
Re:	Property, plant and equipment

To know how to write a business memo, you can make a search on the Internet (e.g. http://www.writeexpress.com/business-memo.html)