BFD Co

Hello,

Sorry for this long question.

Year of operation 1 2 3 4
Accounting year 2005/6 2006/7 2007/8 2008/9
Sales volume (units) 100,000 200,000 130,000 140,000

Sales after 2008/9(the fourth year of operation) are expected to continue at the 2008/9 level in perpetuity.
Initial investment of $3m would be required in new premises and machinery, as well as an additional $200,000 of WC. The directors have no further financial resources to offer and are considering approaching their bank for a loan to meet their investment needs.

SP and standard cost data for product based on annual budgeted volume of 100,000 units, are as follows,
Sp – $18/unit
Direct material- $7
Direct labour- $1.50
Fixed prod overhead- $4.50

The fixed prod overhead is incurred exclusively in the production of product and excludes depreciation, Sp and standard unit VC data are expected to remain constant.
The Co expects to be able to claim WDA in the initial investment of $3m in a straight-line basis over 10 years. The Co pays tax on profit at annual rate of 25% in the year in which the liability arises and has an after-tax cost of capital of 12%.

Required to calculate the NPV. Assume that it is now 1/Dec/2005.

I don’t understand how the examiner has calculated the profits from year 5 to perpetuity.

Suggested answer- $660,000/0.12 = $5,500,000
PV of these cashflows = $5,500,000 * 0.636 = $3,498,000

My approach –
1/0.12= 8.333
Less 4-year AF= (3.037)
= 5.296
=5.296*$660,000
= $3,495,360.

Where have I gone wrong ? is it due to rounding up
Please advise.