The research and development team of AB Ltd has just developed an electronic chipset, AB007, for gamers computer. The production of AB007 will lasts for four years only as new technology will emerge the market by that time. The marketing department has worked together with the accounting department and has come up with the following forecast:

Year 1 2 3 4 Sales volume (units) 70,000 90,000 100,000 75,000 Average selling Price (Rs / Unit) 41 46 52 52 Average variable costs (Rs / Unit) 30 28 25 23 Incremental fixed costs (Rs / year) 600,000 575,000 550,000 500,000

The above data have been prepared on the basis of current prices and no account of inflation has been taken for the following costs:

AB Ltd would be required to purchase a new machine costing Rs 1,000,000 upon which it can claim capital allowances of 25% per annum on a reducing balance basis. The machine is expected to have a scrap value of Rs 100,000 at the end of the project. The company pays tax of 15% on profits. Tax is half-payable in the current year and half one year in arrears. The after-tax cost of capital is 6% (money terms).

REQUIRED (a) Calculate the net present value (NPV) of the proposed investment. [30 Marks] (b) The companys policy is that capital investments should pay back within two years on an undiscounted basis, and within three years on a discounted basis. Calculate, to the nearest month, the payback period and the undiscounted payback period of the proposed investment. [5 Marks] (c) Discuss the acceptability of the proposed investment, given the companys capital investment policy. [5 Marks] Year 1 2 3 4 Sales volume (units) 70,000 90,000 100,000 75,000 Average selling Price (Rs / Unit) 41 46 52 52 Average variable costs (Rs / Unit) 30 28 25 23 Incremental fixed costs (Rs / year) 600,000 575,000 550,000 500,000