Wimbledon plc, a manufacturer of hi-tech tennis rackets, intends to produce a new racket, the Aggressor. Its finance department has instructed you to evaluate the Aggressor project using the NPV and payback methods on the basis of the following information. The company uses a discount rate of 15% per year in nominal terms but prices and costs have been estimated in real terms. The inflation rate is taken to be 4% per year over the life of the project which is to be 5 years. R&D costs prior to the start of the project have been 20,000. Premises to be used to house the manufacturing facility are already owned by the company but would be sold for 150,000 if the project is not undertaken. It is assumed that the value of the premises will be maintained at the same level in real terms and will become available at the end of the project. The cost of equipment, which is required immediately, is 500,000 and this is subject to a capital allowance of 20% per year using the declining balance method. At the end of the project it is estimated that the equipment can be sold for 70,000 in real terms. Working capital of 40,000 is required and this must be adjusted at the end of each year to account for inflation. This will be returned at the end of the project. The net operating income per year is expected to be 200,000. It may be assumed that all cash flows are affected by inflation and at the same percentage per year. Corporation tax is 28% per year.

Required: (a) Create a table showing all the relevant cash flows in nominal terms. (60%) (b) Calculate the payback period. (10%) (c)Calculate the projects NPV. (20%) (d) Would you recommend that the project is undertaken? Explain the reason for your opinion. (10%)