ciation) are absorbed into product costs at the rate of 150% of direct labour costs. All other fixed costs will be incremental expenses. Tax is 35% of profits, payable one year in arrears. The after-tax cost of capital is 16%. Present Value (PV) of $1; p.a at 16% is as follows:-  Year 1 = 0.862  Year 2 = 0.743  Year 3 = 0.641  Year 4 = 0.552  Year 5 = 0.476 Required: Calculate the Net Present Value (NPV) of the project? (Calculate to the nearest $'000) (show all you calculations)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Kovik Ltd is considering a four-year project involving the purchase of equipment costing
$600,000. Tax allowable depreciation would be 25% per year on a straight line basis. Sales
would be $1,200,000 per annum and the cost of sales (including depreciation) would be
$900,000 per annum for each of the four years.
All Variable costs are cash expenses and will be one-third of sales. Variable costs consist of
25% direct labour costs and 75% materials costs. General fixed overheads (not including
depreciation) are absorbed into product costs at the rate of 150% of direct labour costs. All
other fixed costs will be incremental expenses.
Tax is 35% of profits, payable one year in arrears. The after-tax cost of capital is 16%.
Present Value (PV) of $1; p.a at 16% is as follows:-
 Year 1 = 0.862
 Year 2 = 0.743
 Year 3 = 0.641
 Year 4 = 0.552
 Year 5 = 0.476
Required:
Calculate the Net Present Value (NPV) of the project? (Calculate to the nearest $'000) (show
all you calculations)

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