a.
$000
0 1 2 3 4 5
Year
Sales (w1) 5670 6807.938 5788.125 6928.386
Variable cost (w2) -3307.2 -4089.904 -3513.497 -4039.926
Fixed cost (w3) -776.25 -803.4187 -831.5384 -860.6423
Taxable profit 1586.55 1914.615 1443.089 2027.817
Tax paid -444.234 -536.0921 -404.065 -567.7888
Tax benefit (w4) 350 262.5 196.875 478.625
Initial investment -5000
Scrap value 400
Net CF -5000 1586.55 1820.381 1169.497 2220.627 -89.16379
Discount factor 1 0.884956 0.783147 0.69305 0.613319 0.54276
Discounted Net CF -5000 1404.027 1425.625 810.5203 1361.952 -48.39453
Net Present value of Project -46.2704
Financially, because NPV of project <0, OAP Co should reject this project
Working 1
W1: Sale
$000 $000 $000 $000 $000
0 1 2 3 4
Year
Sale volume (000 unit) 12 13 10 10
Selling price (before ifnflation) 450 475 500 570
Selling price (inflated) 472.5 523.6875 578.8125 692.8386
Sale revenue 5670 6807.938 5788.125 6928.386
Working 2
Sale volume (000 unit) 12 13 10 10
Variable unit cost (before ifnflation) 260 280 295 320
Variable unit cost (inflated) 275.6 314.608 351.3497 403.9926
Total variable cost 3307.2 4089.904 3513.497 4039.926
Working 3: Fixed cost
Fixed cost (before inflation) 750 750 750 750
Fixed cost (inflated) 776.25 803.4187 831.5384 860.6423
Working 4: tax benefit
Year 0 1 2 3 4
Opening balance 5000 3750 2812.5 2109.375
Depreciation expense 1250 937.5 703.125 1709.375
Closing balance 3750 2812.5 2109.375 400 = scrap value
Tax benefit 350 262.5 196.875 478.625
= scrap value