a) To prepare the statement of tax shield on capital allowance, we need to calculate the annual capital

allowances and the corresponding tax shields.

The plant and equipment cost is £18,200,000 and will depreciate on a 20 percent reducing balance basis.

The capital allowances each year will be:

Year 1: £18,200,000 x 20% = £3,640,000

Year 2: (£18,200,000 - £3,640,000) x 20% = £2,912,000

Year 3: (£18,200,000 - £3,640,000 - £2,912,000) x 20% = £2,329,600

Year 4: (£18,200,000 - £3,640,000 - £2,912,000 - £2,329,600) x 20% = £1,863,680

Year 5: (£18,200,000 - £3,640,000 - £2,912,000 - £2,329,600 - £1,863,680) x 20% = £1,490,944

Year 6: (£18,200,000 - £3,640,000 - £2,912,000 - £2,329,600 - £1,863,680 - £1,490,944) x 20% =

£1,192,755.20

Year 7: (£18,200,000 - £3,640,000 - £2,912,000 - £2,329,600 - £1,863,680 - £1,490,944 - £1,192,755.20) x

20% = £954,204.16

The tax shield is calculated as the capital allowances multiplied by the corporation tax rate of 30%:

Year 1 tax shield: £3,640,000 x 0.30 = £1,092,000

Year 2 tax shield: £2,912,000 x 0.30 = £873,600

Year 3 tax shield: £2,329,600 x 0.30 = £698,880

Year 4 tax shield: £1,863,680 x 0.30 = £559,104

Year 5 tax shield: £1,490,944 x 0.30 = £447,283.20

Year 6 tax shield: £1,192,755.20 x 0.30 = £357,826.56

Year 7 tax shield: £954,204.16 x 0.30 = £286,261.25

The value of the tax shield at time zero is the present value of the tax shields. Using a discount rate of
14%, the present value is calculated as:
£1,092,000 / (1 + 0.14) + £873,600 / (1 + 0.14)^2 + £698,880 / (1 + 0.14)^3 + £559,104 / (1 + 0.14)^4 +
£447,283.20 / (1 + 0.14)^5 + £357,826.56 / (1 + 0.14)^6 + £286,261.25 / (1 + 0.14)^7

b) To prepare the estimate of "Statement of Comprehensive Income", we need to consider all income
and expense items up to the tax liability.

The income items include:

- Sales revenue from the new medium-price line of golf clubs: £700 x 55,000 sets = £38,500,000

- Sales revenue lost from the high-priced clubs: £1,200 x 13,000 sets = £15,600,000

- Increase in sales revenue from the cheap clubs: £400 x 12,000 sets = £4,800,000

The expense items include:

- Variable costs from the new medium-price line of golf clubs: £320 x 55,000 sets = £17,600,000

- Variable costs from the high-priced clubs: £700 x 13,000 sets = £9,100,000

- Variable costs of the cheap clubs: £200 x 12,000 sets = £2,400,000

- Fixed costs: £7,500,000

- Research and development cost: £1,000,000

The tax liability is calculated as the taxable profit (income - expenses) multiplied by the tax rate of 30%.

c) To prepare the statement of an estimate of incremental cash flows resulting from implementing the
project and show a change in net cash flows, we need to consider all the cash inflows and outflows.
The cash inflows include:

- Sales revenue from the new medium-price line of golf clubs: £700 x 55,000 sets

- Sales revenue lost from the high-priced clubs: £1,200 x 13,000 sets

- Increase in sales revenue from the cheap clubs: £400 x 12,000 sets

The cash outflows include:

- Variable costs from the new medium-price line of golf clubs: £320 x 55,000 sets

- Variable costs from the high-priced clubs: £700 x 13,000 sets

- Variable costs of the cheap clubs: £200 x 12,000 sets

- Fixed costs

- Research and development cost

- Depreciation expense

- Increase in net working capital

The change in net cash flows is the difference between the cash inflows and the cash outflows.

d) To use the net cash flows estimated above to calculate the discounted payback period, NPV, and
profitability index, we need to discount the net cash flows using the cost of capital of 14%.

The discounted payback period is the number of years it takes for the discounted cumulative cash flows
to equal or exceed the initial investment.

The NPV is calculated as the sum of the discounted cash flows minus the initial investment.

The profitability index is calculated as the present value of cash inflows divided by the present value of
cash outflows.