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ABC plc is evaluating project A on which it has recently spent 6000 on R&D, which is irrecoverable.

1. ABC plc is evaluating project A on which it has recently spent £6000 on R&D, which is irrecoverable. Moreover, the company auditor proposes to charge a contribution to sales force overheads of £3,000 to the project. Unfortunately, for the project to proceed, ABC needs to spend an additional £10000, which can be written down entirely after one year. The cash inflows from the end of year 1 onwards are:
End of Year Cash Flows £
1 1250
2 6250
3 9766
There is nil scrap value on the asset at the end of the 3rd year. The discount rate for the project is 15% p.a. Ignore taxation. The planning department uses two measures to assess projects: NPV and IRR. Calculate both.

1. ABC plc is evaluating project A on which it has recently spent Ј6000
on R&D, which is irrecoverable. Moreover, the company auditor proposes
to charge a contribution to sales force overheads of Ј3,000 to the
project. Unfortunately, for the project to proceed, ABC needs to spend
an additional Ј10000, which can be written down entirely after one
year. The cash inflows from the end of year 1 onwards are:
End of Year Cash Flows Ј
1 1250
2 6250
3 9766
There is nil scrap value on the asset at the end of the 3rd year. The
discount rate for the project is 15% p.a. Ignore taxation. The planning
department uses two measures to assess projects: NPV and IRR. Calculate
both.

This question was asked on Apr 27, 2010.

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