You are the chief accountant of Deighton plc, which manufactures a wide range of building and plumbing fittings. It has recently taken over a smaller unquoted competitor, Linton Ltd. Deighton is currently checking through various documents at Lintons head office, including a number of investment appraisals. One of these, a recently rejected application involving an outlay on equipment of 900,000, is reproduced below. It was rejected because it failed to offer Lintons target return on investment of 25 per cent (average profit-to-initial investment outlay). Closer inspection reveals several errors in the appraisal. Evaluation of profitability of proposed project NT17 (all values in current year prices).

Item	0	1	2	3	4
Sales		1400	1600	1800	1000
Materials		400	450	500	250
Direct Labour		400	450	500	250
Overheads		100	100	100	100
Interest		120	120	120	120
Depreciation		225	225	225	225
Profit Pre-tax		155	255	355	55
tax at 33%		51	84	117	18
post tax profit		104	171	238	37
outlay
stock	100
equipment	900
market research	200
	1200
Rate of return =	Averageprofit/investment =	138/1200=	11.5%

You discover the following further details: 1 Lintons policy was to finance both working capital and fixed investment by a bank overdraft. A 12 per cent interest rate applied at the time of the evaluation. 2 A 25 per cent writing-down allowance (WDA) on a reducing balance basis is offered for new investment. Lintons profits are sufficient to utilise fully this allowance throughout the project. 3 Corporation tax is paid a year in arrears. 4 Of the overhead charge, about half reflects absorption of existing overhead costs. 5 The market research was actually undertaken to investigate two proposals, the other project also having been rejected. The total bill for all this research has already been paid. 6 Deighton itself requires a nominal return on new projects of 20 per cent after taxes, is currently ungeared and has no plans to use any debt finance in the future. Question :- Write a report to the finance director in which you:

(a) Identify the mistakes made in Lintons evaluation.

(b) Restate the investment appraisal in terms of the post-tax net present value to Deighton, recommending whether the project should be undertaken or not?