Newlight Engineering is looking at the possibility of developing a new product called The

Therm Controller. The demand for the product based on market research and a survey has been

very positive. The survey indicates that the product could achieve a reasonable level of sales

for 4 years. The survey which cost 50,000 has already been paid.

The initial capital outlay for new machinery to produce the The Therm Controller will be

1,620,000. The machinery will have a useful life of 4 years and a nil scrap value at the end of

year 4. If Newlight Engineering is to produce The Therm Controller, a training programme for

staff will have to be put in place which will cost 100,000 and will be required prior to

production commencing. An additional investment in working capital of 125,000 will be

needed.

Sales and costs are estimated as follows:

Year 1 2 3 4

000 000 000 000

Sales 970 1,050 1,080 1,120

Cost of sales 550 510 505 480

Depreciation 405 405 405 405

Interest on Loan 24 24 24 24

Profit before Tax (19) 41 61 51

The employees that will be directly involved in producing the new product have no work at

present and, if it is not produced, they will be made redundant immediately at a cost of

250,000. If, however, the device is produced, the employees are likely to find other work at

the end of the four-year period and so no redundancy costs will be incurred.

NewLight Engineering has a cost of capital of 13%. All cash flows may be assumed to arise at

year-end (except for the initial investment and working capital costs).

Actions required:

(a) Prepare a cashflow and calculate the Net Present Value for the new product (40%)

(b) Carry out a separate what if sensitivity analysis to show by how much the following

factors would impact the NPV of the project.

(i) A 7% increase in the initial outlay on machinery (15 %)

(ii) A 7% increase in cost of capital (round to nearest whole number ( 15%)

(c) You have been employed as a consultant by Newlight Engineering to evaluate the

viability of this new product. Write a report