Camp plc has produced and marketed sleeping bags for several years. The sleeping bags are much heavier than some of the modern sleeping bags being introduced to the market. The

company is concerned about the effect this will have on its sales. Camp plc are considering

investing in new technology that would enable them to produce a much lighter and more

compact sleeping bag. The new machine will cost £250,000 and is expected to have a life of

four years with a scrap value of £10,000. In addition an investment of £35,000 in working

capital will be required initially.

The following forecast annual trading account has been prepared for the project:

                                             £

Sales                                     200,000

Materials                              (40,000)

Labour                                 (30,000)

Variable overheads              (10,000)

Depreciation                    1  (20,000)

Annual profit                     (100,000)

The company’s cost of capital is 10 per cent. Corporation tax is charged at 30 per cent

and is payable quarterly, in the 7th and 10th months of the year in which the profit is earned

and the 1st and 4th month of the following year. A writing-down allowance of 25 per cent

on reducing balance is available on capital expenditure.

Requirement

Advise the management of Camp plc on whether they should invest in the new technology.

Your recommendation should be supported with relevant calculations.