The accountant of your business has recently become ill from overwork. In his absence, his assistant has prepared some calculations of the profitability of a project, which are to be discussed soon at the board meeting of your business. His work, which is set out below, includes some errors of principle. You can assume that the statement below includes no arithmetical errors.

You ascertain the following additional information:
1. The cost of equipment value includes $100,000, which is the book value of an old machine. If it were not used for this project, it would be scrapped with a zero net realizable value. New equipment costing $500,000 will be purchased on December 31, Year 0. You should assume that all other cash flows occur at the end of the year to which they relate.
2. The development costs of $90,000 have already been spent.
3. Overhead has been costed at 50% of direct labour, which is the business's normal practice. An independent assessment has suggested that incremental overhead is likely to amount to $30,000 a year.
4. The business's cost of capital is 12%.
Ignore taxes in your answer. Required:
(a) Prepare a corrected statement of the incremental cash flows arising from the project. Where you have altered the assistant's figures, you should attach a brief note explaining your alterations.
(b) Calculate:
(i) The project's payback period
(ii) The project's net present value as at December 31, Year 0.
(c) Write a memo to the board advising on the acceptance or rejection of the project.

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Year 1 Year 2 Year 3 Year 4 Year 5 Year ($000) ($000) ($000) (00) ($000) ($000) Sales revenuse Less: Costs Materials Labour Overhead Depreciation Working capital Interest on working capital Write-off of development costs Total costs Profit (loss) 450 470474470 126 132 90 4547 120 120 120 120 120 132 94 47 132 94 47 132 94 47 94 180 27 27 27 2727 180 438 450 450 420 420 (180) 12 20 20 50 Total profit (loss) Cost of equipment $(28,000) = Return on investment (4.796) $600,000