Data Tilsley Ltd manufactures motor vehicle components. It is considering introducing a new product. Helen Foster, the production director, has already prepared the following projections for this proposal:

Helen Foster has recommended to the board that the project is not worthwhile because the cumulative after tax profit over the four years is less than the capital cost of the project.
As an assistant accountant at the company you have been asked by Philip Knowles, the chief accountant, to carry out a full financial appraisal of the proposal. He does not agree with Helen Foster's analysis, and provides you with the following information:
€¢ The initial capital investment and working capital will be incurred at the beginning of the first year. All other receipts and payments will occur at the end of each year;
€¢ The equipment will cost £10 million;
€¢ Additional working capital of £1 million;
€¢ This additional working capital will be recovered in full as cash at the end of the four-year period;
€¢ The equipment will qualify for a 25 per cent per annum reducing balance writing-down allowance;
€¢ Any outstanding capital allowances at the end of the project can be claimed as a balancing allowance;
€¢ At the end of the four-year period the equipment will be scrapped, with no expected residual value;
€¢ The additional working capital required does not qualify for capital allowances, nor is it an allowable expense in calculating taxable profit;
€¢ Tilsley Ltd pays corporation tax at 30 per cent of chargeable profits;
€¢ There is a one-year delay in paying tax;
€¢ The company's cost of capital is 17 per cent.
Task
Write a report to Philip Knowles. Your report should:
(a) Evaluate the project using net present value techniques;
(b) Recommend whether the project is worthwhile;
(c) Explain how you have treated taxation in your appraisal;
(d) Give three reasons why your analysis is different from that produced by Helen Foster, the production director.

Year (000) (000) (E000) (000) Sales Direct materials Direct labour Direct overheads Depreciation Interest Profit before tax 8750 12250 13 300 14 350 1340 1875 2250 2625 2675 3750 4500 5250 250 2500 2500 2500 2500 185 250 250 1038 2863 2788 2713 Corporatioqtax @ 30% -311 859 836 814 727 2004 195 1899 Profit after tax