Simply Company is a company which was established four $(4)$ years ago in Autoland $($a fictitious country$)$ and uses the Autoland $ as its currency. The company is financed by ordinary shareholders $($common stockholders$)$ and external debt through a bank loan. The shareholders have contributed $50\%$ of the total capital employed and have expectations of an annual return of $16\%$ on their investment. The bank charges $10\%$ interest on the loan. The annual company taxation in Autoland is $20\%.$ This tax rate is expected to remain at this rate for the foreseeable future. Tax bills based on Autoland$$s tax regulations are calculated as $20\%$ of annual sales. Bank interest is tax deductible. Tax is paid one year in arrears. Inflation in Autoland is negligible.

The company is considering investing in a new project from $1$st August $2024$ and intends to operate the project for three $(3)$ years before selling that project in Year $4$ for $$2,069,000.$ The company intends to purchase AI software to use to provide specialised AI services to customers who design and sell accounting systems to supermarket retailing businesses. When sold in Year $4,$ no tax would be payable on any profits$/$losses on disposal of the project given the tax regulations in Autoland.

Between now and $1$st August $2024,$ the company will i$)$ arrange to lease business premises for three $(3)$ years, and ii$)$ purchase specialised equipment with a useful life of three $(3)$ years. The annual cost of the lease will be $$500,000,$ payable in advance annually on $15$th July each year. The specialised equipment will cost $$6$ million and will be fully depreciated by the end of year three $(3),$ and will have zero residual value.

Customers will pay for AI services provided on a monthly basis at a set monthly fee of $$50,000$ for each customer, with bank transfers from customers being received in the month that services are provided.

The following information is available in relation to the new project:

i$.$ Ten $(10)$ customers are anticipated in Year $1,$ increasing to fifteen $(15)$ in Year $2,$ and increasing to twenty $(20)$ in Year $3,$ although as these are projections they could vary from year to year.

ii$.$ Annual production variable costs are projected to be $20\%$ of annual sales in each year although these could increase if the price software costs increase.

iii. Staff salaries, all fixed, will total $$500,000$ in each operational year, paid in cash on a monthly basis. These salaries relate to five $(5)$ staff members currently employed by Simply Company. Each staff member earns $$100,000$ annually. If the business is sold at the end of Year $3,$ these employees will be transferred to the payroll of the purchaser of the project.

iv$.$ The staff members referred to in c$)$ immediately above are currently working on another project which generates $$1$ million contribution annually for Simply Company. Work on this project will be suspended for three $(3)$ years.

i$.$ Annual company administration fixed overheads charged to the project will be $$2,000,000,60\%$ of which will be an allocation of Simply Company$$s existing head office administration costs which will be charged to the new project, and $40\%$ overheads which do not currently exist.

ii$.$ Marketing and advertising fixed costs will be $$2,000,000$ annually, paid in each year with no delays.

iii. A firm of consultants had advised Simply Company on the feasibility of the proposed project. The firm$$s bill of $$1$ million for advisory services had been agreed in January $2024,$ to be paid by Simply Company whether the project proceeded or not. This bill will be paid in September $2024.$

The company uses a combination of approaches to appraise potential new projects. These are i$)$ annual contributions as a percentage of sales forecasts, the target being an annual minimum of $68\%$; ii$)$ net present value calculations $($NPV$)$; iii$)$ a hurdle rate of $20\%$ linked to risks associated with all new projects. It then interrogates the calculations to provide insights into the decisions to proceed or not with any proposed projects. One of the senior management team is concerned about liquidity challenges facing the company. Another is of the opinion that as this is a new project using new technology it is riskier than the company$$s usual projects.

Required

Advise the senior management team of Simply Company whether to proceed with this new project. Support your advice with articulation of your reasoning and justification, and calculations as appropriate. In so doing:

a$)$ Calculate and show the annual contribution as a percentage of sales $($contribution margin$)$ forecasts for each of the three $(3)$ years. Locate your calculations in an appendix. Calculations in the appendix are not included in maximum word count.

b$)$ Calculate the weighted average cost of capital to be applied to the project as the discount factor. Locate your calculations in an appendix. Calculations in the appendix are not included in maximum word count.

c$)$ Prepare a schedule of annual, including time zero, inc