The chief executive officer (CEO) of XYZ Sugar Cane Mill Ltd has decided to stop sugar cane cultivation in the region of Lagos and to develop a smart city in that region. During the board meeting, the directors have given their approval for the project and decided to implement the project in three phases. The first phase of the project will consist of: 1. building houses and selling it; 2. building of office park and renting of office suite. In another board meeting, the marketing director with the help of the finance director has been able to gather information on the project of house construction but informed the board that he is still working on the Office park project. In the first phase, 50 houses will be built over 4 years and two different types of houses will be offered: 1. Apartment; and 2. Duplex Apartment. The forecasted annual sales of each type of apartment are as follows: Year 1 2 3 4 Number of Apartment 5 5 15 9 Number of Duplex Apartment 2 3 7 4 The financial information relevant for the project is as follows: Several machines and equipment will be purchased costing $ 4,000,000 at the start of the project and are expected to be sold for $ 500,000 at end of the project. Type of houses Apartment ($) Duplex Apartment ($) Selling price (current price terms) 400,000 550,000 Variable cost of construction (current price terms) 125,000 215,000 Selling price inflation is 3% per year and variable cost of construction inflation is 3.5% per year. Incremental fixed costs (current price terms) of $ 1,500,000 per annum will be incurred over the four years. Fixed cost inflation is expected to be 1.5% per year. Houses are built and sold in the same year. Page 3 of 6 The company pays tax on profit one year in arrears at an annual rate of 25%. The company can claim capital allowances at the rate of 25% per annum on the purchase cost of the machines and equipment over the four years of construction. The nominal after-tax cost of capital of the company is 15% and the present value table of 15% is as follows: Year 1 2 3 4 5 Present value 0.8696 0.7561 0.6575 0.5718 0.4972 REQUIRED (a) Calculate the net present value of the proposed investment and evaluate the financial acceptability of the project. [32 marks]