The initial investment for the acquisition of the machinery in the project is R$2$ million.

The selling price in current price terms $($therefore Year $0)$ is R$13,20$ per unit and it

is expected that the price will increase at a rate of $4\%$ per annum.

The variable cost in current price terms is R$7,48$ per unit and it is expected that the

price will increase at a rate of $3\%$ per annum.

The fixed overhead costs in current price terms are R$525000$ per year and it is

expected that these costs will increase at a rate of $5\%$ per annum.

Fixed costs include R$225000$ per year of development costs that have already

been incurred and are being recovered by an annual charge to the project.

The investment will be financed through a R$2$ million loan at a fixed interest rate of

$12\%$ per year.

Gosling Wines can claim $25\%$ capital allowances on the cost of investment and the

current company tax rate is $27\%.$

The value of the machinery required for the investment project at the end of the

four$-$year period is R$275000.$

The real weighted average cost of capital $($WACC$)$ of Gosling wines is $10\%.$

The general rate of inflation is expected to be $4,9\%$ per year.

$($a$)$ Recalculate the net present value of the proposed investment project and

comment on the acceptability of the proposed project.

$[$Round your answers to the nearest Rand$]$

$(25)$

$($b$)$ Identify any errors in the proposed investment project prepared by the trainee

accountant and comment on the errors, if any, you identified. $(10)$