The Sonic Sound Company is based in the fictitious country of Audioland and uses the Audioland $ as its currency. It specialises in manufacturing and selling speakers for audio equipment. It is currently considering investing in a new three$-$year $(3$ years$)$ project for a new product called Amp Arc. The product is a wireless amplifier for electric guitars. Thus far, the company has specialised in low volume, niche$-$market products and this is its first venture into high volume standard$-$type products. The company has already spent $$1$ million on researching and developing the product and intends to start production and sales on $1$ January $2025.$ Other details are:

$1.$ Projected annual sales are forty thousand $(40,000)$ units in each year of the project$$s three$-$year operational life.

$2.$ The product will sell for $$400$ for each unit, based on price values $($$$)$ in $2024.$

$3.$ Variable costs are budgeted to be $$300$ for each unit, based on price values $($$$)$ in $2024.$

$4.$ The project will use part $(50$ per cent$)$ of the company$$s existing factory building. This part of the factory building is currently being used on a project which will finish on $31$ December $2024.$ The entire factory building is currently rented at a cost of $$1$ million annually $$ as it has been for the past five $(5)$ years, and this rent should not, at least in principle, increase over the life of the new project, although the rental agreement is to be reviewed by the factory owner on $31$ December $2024.$

$5.$ The new project will use existing equipment purchased on $1$ January $2021$ for $$10$ million. This equipment has already been fully depreciated with $zero residual value and has already benefited fully from taxation capital allowances. It is still in good working condition.

$6.$ The new project will also require the purchase of a new piece of equipment on $31$ December $2024$ for

$$12$ million, with a useful production life of three $(3)$ years, depreciated for accounting purposes on a straight$-$line basis, and with $$0$ residual value on $31$ December $2027,$ the end of its useful three$-$year $(3-$year$)$ production life.

$7.$ Assume annual taxation capital allowances on the new equipment are currently $25\%$ on a reducing balance basis.

$8.$ The company anticipates being able to sell the rights to the manufacture and sales of the Amp Arc to another company in December $2027$ for $$3,620,000,$ with the sale being concluded and cash received on $31$ December $2027,$ and with no tax payable on that value.

$9.$ The project, as with each of the company$$s projects, will receive an annual company overhead charge of $$500,000$ relating to the company$$s existing fixed overheads.

$10.$ The project is likely to result in the company$$s additional annual fixed overheads of $$1$ million in cash payments, based on price values $($$$)$ in $2024.$

$11.$ The company supports projects by setting aside funds for working capital on an annual basis equivalent to $10\%$ of each of the next year$$s sales value $($$$),$ with that amount being set aside in advance of the following year$$s sales.

$12.$ Company taxation is $20\%$ annually and is paid one year in arrears. $($For ease of calculation assume that the $20\%$ tax rate is applied to each annual figure $($$$)$ based on: sales $($$$)$ minus variable costs $($$$)$ minus incremental fixed costs $($$$)$ associated with the project $$ do not include annual working capital amounts in the taxation calculation.$)$

$13.$ In your calculations, show separately i$)$ the taxation payable on sales $($$$)$ minus variable costs $($$$)$ minus incremental fixed costs $($$$)$ associated with the project, and ii$)$ tax savings arising from capital allowances.

$14.$ The general annual inflation rate across the life of the project is forecast to be $5\%.$

$15.$ The sales price $($$$)$ of each unit is likely to be impacted by an annual inflation rate of $10\%$ in each year.

$16.$ The variable cost $($$$)$ of each unit is likely to be impacted by an annual inflation rate of $10\%$ in each of $2025$ and $2026,$ after which the variable cost will stabilise.

$17.$ The incremental fixed overheads arising from the new project are likely to be impacted by an annual inflation rate of $10\%$ in each year.

$18.$ The company is funded by a combination of ordinary shareholders$$ equity, a fixed interest rate bank loan, and a semi$-$variable $($floating rate$)$ bank loan. Its weighted average cost of capital $($WACC$),$ as in February $2024$ and unadjusted for inflation, is $10\%.$

$19.$ The company$$s senior management team is of the opinion that the WACC figure will not be affected

by inflation across the life of the project.

$20.$ The company is aware that Audioland$$s central bank is concerned about what it perceives to be a high rate of general inflation and is keeping a watchful eye on interest rates.

Required

a$)$ The company$$s senior management team has asked you to prepare a schedule detailing the project$$s incremental cash flows $($the relevant costs$)$ associated with the proposed project overall and from those incremental cash flows determine the net present value $($NPV$)$ of the project.