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Sir, it is mentioned in the question as point 4 that Annual Fixed overhead costs would be $2.5million of which 60% are centrally allocated overheads.
What is the relevance of 60% centrally allocated Fixed Overheads?
Are we to consider 100% of it while calculating the base NPV?We are only ever interested in incremental/extra cash flows from investing in a new project.
Centrally allocated overheads are general overheads of the company as a whole. They can allocate/share them between their various operations in any way they want for profit purposes, but we are only concerned with them if the total increases as a result of investing in this new project. There is no indication of that happening and therefore the only extra cost is the 40% that are specifically attributable to the project.
You can see from the examiners answer that the allocated overheads are ignored and not considered for the reason I have just explained.
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