What is the estimated NPV of the project in $? You should include your calculations and the assumptions of the analysis. Comment on your evaluation and elaborate on the key issues the financial manager might consider when investing in the VR project.

Mauritz LTD sells VR headsets. Mauritz has recently spent $500,000 developing a new VR headset that they are hoping to sell in the US, capitalising on the recent popularity of gaming and new technology. The plan is to sell the products in the US, as the market for the headsets grown in volume terms by an average of 30% per annum in recent years. Instagram influencers will be approached to help market the product to new prospect customers. The finance director is convinced that the success of the product will depend on positive reviews from influencers after launching. As outlined below, the market research shows that the predicted volume of sales over the next 3 years will be higher if the online opinions are positive. After this date, the company will review the product and market.

Students should assume that the current date is 30th April 2020.

The initial market research has provided the following information:

Sales volume (predicted) and number of headsets

Year to 30^thApril: 2021 2022 2023

Positive influencer feedback

(probability of 0.8) 60 70 80

Negative influencer feedback

(probability of 0.2) 10 20 30

Students should consider additional company information:

1. The manufacturing will take place in the UK. An investment of 2mln is required on 30th April 2020. The scrap value of the equipment will be 400,000 on 30th April 2023 (stated in 30^thApril 2023 prices).
2. The selling price of the headsets will be $250 per unit for the year to 30th April 2021 and then it is expected to increase by 15% per annum.
3. Other costs have been already converted to USD:
4. Variable costs - 50% of the sales revenue (expected).
5. Fixed costs are expected to be $4 mln for the year to 30th April 2021 and are predicted to later increase by 5% pa. It is expected that 40% of these costs are incremental to the project.

4. Working capital investment of $1.2mln (i.e. already converted to USD) is required on 30th April 2020. It will increase or decrease each subsequent year to ensure that the working capital balance in place at the end of each year is a constant proportion of the following year's expected sales revenue.

5. The plant and equipment will attract 20% (reducing balance) capital allowances in the year of expenditure and in every subsequent year of ownership by the company, except the final year. In the final year, the difference between the plant and equipment's written down value for tax purposes and its disposal proceeds will be treated by the company as either a balancing allowance, if the disposal proceeds are less than the tax written down value, or a balancing charge, if the disposal proceeds are more than the tax written down value.

6. Assume that corporation tax will be payable at the rate of 19% per annum for the foreseeable future and that the corporation tax will be payable in the same year as the cash flows to which it relates.

7. A suitable cost of capital to assess the net present value (NPV) of this project is 14% per annum. The debt interest is expected to be $60,000 per annum.

8. The general level of inflation is expected to be 3% per annum in the US and 2% per annum in the UK.

9. Assume that the exchange rate on 30^thApril 2020 is $1= 0.90