Bose plc has developed a design for a new iPod docking station, and is considering whether it is viable to produce the product as a replacement for its existing product, whose popularity has decreased in the last year. The company publishes its financial accounts at 31 December 2014, and today is 1 January 2015. As the financial manager of the business you have been provided with the following information:

• The machinery required to produce the station will cost £100 million today. The project is likely to become obsolete after 5 years, at which time the machinery will have an expected resale value of £30 million.

• The company has already spent £20 million on market research and development of the prototype for the product.

• Production will take place on premises currently owned but rented out by the company for 35 million per annum.

• The annual sales volume over the life of the project is expected to be 100,000; 100,000;

200,000; 300,000; and 200,000 in years 1–5, respectively. The selling price per unit will be £300 throughout the life of the project.

• The variable costs per unit produced are expected to be as follows:

Materials £90 per machine Wages £30 per machine Others £30 per machine

• The firm’s fixed costs are currently £50 million, and are expected to increase to £55 million as a direct result of this project.
• The project’s working capital requirements for the project are as follows:
Raw materials one-tenth of annual material requirements Finished goods one-tenth of annual total costs of production Debtors one-fifth of annual sales Creditors one-fifth of annual material requirements.
• Tax depreciation on the purchase of the machine is allowed at 25 per cent on a reducing balance basis.
• The company pays corporation tax at 35 per cent, which is payable one year in arrears.
• The opportunity cost of capital for the project is 10 per cent.
Produce a working capital schedule and tax depreciation schedule for the project. Also prepare a change in income statement and show the change in cash flows. Calculate the project’s NPV. Should the project be accepted?