The directors of company ABCD Ltd is planning to invest in a new project that will lasts for five years. Following a preliminary analysis on the market, the accountant of the firm has made the following forecast: Sales units per year 100,000 Rs Selling price per unit (current price levels) 900 Variable costs per unit (current price levels) 600 Incremental fixed costs (current price levels) 3,500,000 per annum Cost of machine 9,000,000 Scrap value of machine at end of the project (constant price terms) 200,000 Inflation rate 5%

The company nominal cost of capital is 10%.

Required:

(a) Calculate the NPV (ignored taxation). [ 5 Marks]

(b) Calculate the sensitivity of the project in relation to sales volume [ 5 Marks]

(c) Discuss your findings of section (a) and (b) above and advise whether the investment proposal is financially acceptable. [ 3 Marks ]

(d) Discuss why it is important to take into consideration risk and uncertainty while appraising a project. [ 5 Marks]