Imo Ltd.

is considering investing in a new project which involves developing and selling of

an innovative gadget targeting youth below 25 years. For this, the company expects to
invest Rs.125 million for a special machinery and Rs.3 million for working capital
requirement.
For the next 5 years, sales and advertising costs will be expected to be as follows:
Year Production/Sales Selling Price per Advertising Cost per
(Units) Unit (Rs) Annum (Rs)
1 7000 11000 8,000,000
2 11000 10500 23,000,000
3 18000 9500 15,000,000
4 20000 9000 15,000,000
5 15000 8500 4,000,000

The machinery has a lifetime of 5 years and the company depreciates its’ machineries
under the straight-line basis at cost. The company is eligible to claim capital allowance at
the rate of 25% per annum on the machinery.
The variable production cost other than advertising cost is expected to be Rs.4,000/- per
unit and the fixed overhead cost including depreciation on machinery is expected to be
Rs.37 million per annum. Working capital can be recovered at the end of the 5th year.
The company pays income tax at the rate of 24% per annum and it should be paid in the
same year. Imo Ltd.’s cost of capital is 10% per annum.
You are required to:
(a) Calculate the Net Present Value (NPV) of the new project.
(b) Assess the viability of the above project based on NPV.