The directors of company Damson Ltd is planning to invest in a new project that will lasts for

four years. Following a preliminary analysis on the market, the accountant of the firm has made

the following forecast:

The company nominal cost of capital is $12\%.$

Required:

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

$($b$)$ Calculate the sensitivity of the project in relation to: $[10$ Marks$]$

$($i$)$ Sales Volume

$($ii$)$ Variable costs

$($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$]$

Sales Volume $($units$)$ per year $25,000$

R s

Selling price per unit $($current price levels$)165$

Variable costs per unit $($current price levels$)95$

Incremental fixed costs $($current price levels$)900,000$ per annum

Cost of machine $1,000,000$

Scrap value of machine at end of the project $($constant price terms$)350,000$

Inflation rate $4\mathrm{.}5\%$