Home / Questions / NPV calculation and taxation Data Tilsley Ltd manufactures motor vehicle components. It i...
NPV calculation and taxation
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:
|
|
Year |
|
|
|
1 |
2 |
3 |
4 |
|
(£000) |
(£000) |
(£000) |
(£000) |
Sales |
8750 |
12250 |
13300 |
14350 |
Direct materials |
1340 |
1875 |
2250 |
2625 |
Direct labour |
2675 |
3750 |
4500 |
5250 |
Direct overheads |
185 |
250 |
250 |
250 |
Depreciation |
2500 |
2500 |
2500 |
2500 |
Interest |
1012 |
1012 |
1012 |
1012 |
Profit before tax |
1038 |
2863 |
2788 |
2713 |
Corporation tax @ 30% |
311 |
859 |
836 |
814 |
Profit after tax |
727 |
2004 |
1952 |
1899 |
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:
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 worth-while;
(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.
Notes:
Risk and inflation can be ignored.
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