Investment Appraisal Practice Question;Section C Q.no.25 (Kaplan Exam Kit)

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Darn Co has undertaken market research at a cost of $200,000 in order to forecast the future cash flows of an investment project with an expected life of 4 years, as follows:

Year Sales Revenue($000) Costs($000)
1 1,250 500
2 2,570 1,000
3 6,890 2,500
4 4,530 1,750

These forecast cash flows are before taking account of general inflation of 4.7% per year. The Cost of the investment project, payable at the start of the first year, will be $2,000,000. The Investment project will have zero scrap value at the end of the fourth year. The level of working capital investment at the start of each year is expected to be 10% of the Sales Revenue in that year.

Tax allowable depreciation would be available on the capital cost of the investment project on a 25% reducing balance basis. Darn Co pays tax on profits at an annual rate of 30% per year , with tax being one year in arrears. Darn Co has a nominal(money terms) after-tax cost of capital of 12% per year.

Calculate the NPV of the investment project in nominal terms and comment on its financial acceptability?