UBS Co is considering a new investment which would start immediately and last four years. The investment proposal is based on the following assumptions:

Asset cost $-160,000$

Residual value $($RV$)-40,000$

$25\%$ reducing balance writing$-$down tax allowances are available on the asset cost.

Annual sales $-30,000$ units in Yee $1$ and $2$ and will then fall by $5,000$ units per year in both Years $3$ and $4.$

Selling price $-4\mathrm{.}40$ per unit in Year $1$

Selling price inflation $-3\%$ per annum from Year $2$ onwards.

Variable costs $-0\mathrm{.}70$ per unit in current term.

Incremental fixed costs $-0\mathrm{.}30$ per unit in current term.

Cost price inflation $-5\%$ per annum from Year $1$ onwards and applies to variable and incremental fixed costs.

The project will require working capital investment equal to $10\%$ of the expected sales revenue. The company only needs to invest more if required and can withdraw the investment if the current investment exceeds the required amount. This investment must be in place at the start of each year.

Corporation tax $-30\%$ per annum paid one year in arrears.

The cost of capital is $12\%.$

$12,000$ has already been spent on initial research.

Required

The senior managers require the management accountant to build a financial model for this Investment. Senior managers will use the model for discussing the suitability of the investment; and in particular, how viable the investment would be if all the inflation rates increased. The senior managers also require a report analysing the investment decision and a clear recommendation based on the calculation of NPV$.$

You are only required to base a decision on the NPV rule.