yout Review View Help References Mailings QUESTION A1 Aladdin plc is currently considering launching a new product. A market survey was recently undertaken at a cost of 40,000 and based on this, the following forecasts were prepared by Aladdin plc's assistant accountant: Year 1 2 3 4 000 000 000 000 280 250 300 230 Sales Variable costs Fixed overheads (92) (100) (90) (120) (90) (112) (90) (90) The additional information below is also relevant to this project: The new product will require a specialist machine to be purchased immediately at a cost of 400,000. Its estimated residual value at the end of production is 80,000 An immediate investment of 20,000 is required for working capital, increasing to 25,000 at the end of the first year. It will be released at the end of the period. The fixed overheads above include the annual depreciation charge for the machine. Aladdin pic depreciates all its assets on a straight-line basis. Tax of 20% is payable one year in arrears on operating cash flows. Capital allowances of 25% a year on a reducing balance basis are available if the machine is purchased. The company has a cost of capital of 12%. . . Required: a) Calculate the Net Present Value of the project. (13 marks) b) Aladdin plc has the option to lease the machine at an annual rent of 100,000 for four years, payable at the start of each year. Using a pre-tax borrowing cost of 10%, recommend whether the company should lease or buy the machine. (8 marks) D Focus