You are a member of a group of financial consultants who have been called in to help Green Energy Plc, who have recently taken over a smaller, unquoted competitor, South Westerly Turbines Ltd Green Energy Plc have been checking over various documents at South Westerly Turbines head office, including a number of recent project appraisals carried out by South Westerly Turbine Among the appraisals a recently rejected project has been found which involves an outlay on equipment of 6 8 million The analysis relating to the project is reproduced below The project was rejected on the grounds that it failed to return South Westerly Turbines target accounting rate of return on investment of 18 Green Energy Plc would like you to analyse the project more closely as their accountant has already found several errors South Westerly Turbines appraisal of a proposed project to upgrade wind turbines through investment in new equipment (000) 0 1 2 3 4 Increase in sales 9,000 7,000 7,500 8,500 8,500 Materials 2,400 2,600 2,800 2,800 Direct labour 2000 2000 2000 2000 Overheads 600 600 600 600 Interest 400 400 400 400 Profit pre tax 1,100 1,900 2,700 2,700 Tax 33 363 627 891 891 Post tax profit 737 1273 1809 1809 Immediate Outlay at Year 0 (in 000s) Working Capital (1,200) Equipment (6,800) Market Research (1,000) (9,000) Rate of return (000) Average profit 1,407 15 63 Investment 9,000 You also discover the following information 1 A 25 writing down allowance on a reducing balance basis is available for this new investment South Westerly Turbines profits are sufficient to utilize this allowance throughout the project 2 Corporation tax is paid yearly in arrears 3 Approximately half of the overhead charge consists of absorption of existing overhead costs 4 The market research was undertaken previously to explore this and another proposal and has already been paid 5 Green Energy Plcs required rate of return on new projects is 14 , after tax 6 The equipment has a (pre tax) scrap value of 900,000 (a) Prepare a new investment appraisal for Green Energy Plc by calculating the post tax net present value (NPV) of the proposed project rejected by South Westerly Turbines Ltd You should recommend whether or not the project should be undertaken Clearly state any assumptions made

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You are a member of a group of financial consultants who have been called in to help Green Energy Plc, who have recently taken over

You are a member of a group of financial consultants who have been called in to help Green Energy Plc, who have recently taken over a smaller, unquoted competitor, South Westerly Turbines Ltd. Green Energy Plc have been checking over various documents at South Westerly Turbines head office, including a number of recent project appraisals carried out by South Westerly Turbine.

Among the appraisals a recently rejected project has been found which involves an outlay on equipment of 6.8 million. The analysis relating to the project is reproduced below. The project was rejected on the grounds that it failed to return South Westerly Turbines target accounting rate of return on investment of 18%.

Green Energy Plc would like you to analyse the project more closely as their accountant has already found several errors.

South Westerly Turbines appraisal of a proposed project to upgrade wind turbines through

investment in new equipment (000):

	0	1	2	3	4
Increase in sales	-9,000	7,000	7,500	8,500	8,500
Materials		-2,400	-2,600	-2,800	-2,800
Direct labour		-2000	-2000	-2000	-2000
Overheads		-600	-600	-600	-600
Interest		-400	-400	-400	-400
Profit pre tax		1,100	1,900	2,700	2,700
Tax @ 33%		363	627	891	891
Post tax profit		737	1273	1809	1809

Immediate Outlay at Year 0 (in 000s)

Working Capital (1,200)

Equipment (6,800)

Market Research (1,000)

(9,000)

Rate of return: (000) Average profit = 1,407 = 15.63%

Investment 9,000

You also discover the following information:

1. A 25% writing-down allowance on a reducing balance basis is available for this new investment. South Westerly Turbines profits are sufficient to utilize this allowance throughout the project.

2. Corporation tax is paid yearly in arrears.

3. Approximately half of the overhead charge consists of absorption of existing overhead costs.

4. The market research was undertaken previously to explore this and another proposal and has already been paid.

5. Green Energy Plcs required rate of return on new projects is 14%, after tax.

6. The equipment has a (pre-tax) scrap value of 900,000.

(a) Prepare a new investment appraisal for Green Energy Plc by calculating the post-tax net present value (NPV) of the proposed project rejected by South Westerly Turbines Ltd. You should recommend whether or not the project should be undertaken. Clearly state any assumptions made.