5.In the first year,it is estimated that the total direct material,labour and variable overheads costs will be $1,200 per unit produced.After the first year,the direct costs are expected to increase by an annual inflation rate of 8%.

　　4.Annual fixed overhead costs would be $2.5 million of which 60% are centrally allocated overheads.The fixed overhead costs will increase by 5% per year after the first year.

　　5.Fubuki Co will need to make working capital available of 15% of the anticipated sales revenue for the year,at the beginning of each year.The working capital is expected to be released at the end of the fourth year when the project is sold.

　　Fubuki Co's tax rate is 25% per year on taxable profits.Tax is payable in the same year as when the profits are earned.Tax allowable depreciation is available on the plant and machinery on a straight-line basis.It is anticipated that the value attributable to the plant and machinery after four years is $400,000 of the price at which the project is sold.No tax allowable depreciation is available on the premises.

　　Fubuki Co uses 8% as its discount rate for new projects but feels that this rate may not be appropriate for this new type of investment.It intends to raise the full amount of funds through debt finance and take advantage of the government's offer of a subsidised loan.Issue costs are 4% of the gross finance required.It can be assumed that the debt capacity available to the company is equivalent to the actual amount of debt finance raised for the project.

　　Although no other companies produce mobility vehicles in Megaera,Haizum Co,a listed company,produces electrical-powered vehicles using similar technology to that required for the mobility vehicles.Haizum Co's cost of equity is estimated to be 14% and it pays tax at 28%.Haizum Co has 15 million shares in issue trading at $2.55 each and $40 million bonds trading at $94.88 per $100.The five-year government debt yield is currently estimated at 4.5% and the market risk premium at 4%.

　　Required:

　　(a)Evaluate,on financial grounds,whether Fubuki Co should proceed with the project.(17 marks)

　　(b)Discuss the appropriateness of the evaluation method used and explain any assumptions made in part(a)above.(8 marks)

　　(25 marks)