Stratosphere plc is considering a three-year project to make a new product. The project requires equipment to be bought at a cost of 1.2 million on 30 September 20X1. The equipment attracts a 20% (reducing balance) capital allowance and will be disposed of for 620,000 at the end of the project on 30 September 20X4. A fixed cost of 68,000 p.a. will be allocated to the project out of Head Office overheads. The incremental fixed costs will be 355,000 p.a. An additional rent of 80,000 p.a. will also be required over the three years for the project. The rent is payable in advance and the first payment is due on 30 September 20X1. The first sales from the project will not commence until its second year of operation (i.e., year to 30 September 20X3). The company estimates the following in both of the years to 30 September 20X3 and 20X4:

Annual sales units 88,000

Selling price per unit 40

Variable cost per unit 25

An investment of 340,000 for working capital will be necessary once sales commence. This will need to be in place at the start of the year. This working capital requirement will increase to 350,000 in the following year. The working capital investment will be fully recovered at the conclusion of the project on 30 September 20X4. Corporation tax is payable at the rate of 28% p.a. and the appropriate cost of capital for the project is 8% p.a. Ignore inflation.

Calculate the NPV of the new project as at 30 September 20X1 and advise the company whether production of the new product should proceed.