The accountant of your business has recently been taken ill through 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 workings, which are set out below, include some errors of principle. You can assume that there are no arithmetical errors.

Required:

Ignoring taxation,

(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:

1 The project’s payback period.

2 The project’s net present value as at 31 December Year 0.

(c) Write a memo to the board advising on the acceptance or rejection of the project.

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Year Sales revenue Less Costs Materials Labour Overheads Depreciation Working capital Interest on working capital Write-off of development costs Total costs Operating profit/(loss) 0 £000 180 180 (180) 1 £000 450 126 90 45 120 27 30 438 12 2 £000 470 132 94 47 120 27 30 450 20 3 £000 470 132 94 47 120 27 30 450 20 4 £000 470 132 94 47 120 27 420 50 5 £000 470 132 94 47 120 27 420 50