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Silly Filly Ltd is a recently established company specialising in the manufacture of talking toy horses for children.

Silly Filly Ltd is a recently established company specialising in the manufacture of talking toy horses for children. The Silly Filly range currently comprises three key products - all of which are toy horses - plus approximately thirty accessories to complement the range, from stables to grooming kits.

The Silly Filly range has been such a success in the last year that the management is considering producing an animated film to accompany the range. This is in accordance with the company's long-term expansion plans, culminating in a stock exchange flotation in three year's time.

The film will take one year to make. In the year following that, sales of the film will commence.

You, an accounting technician for the company, have been asked to assist in appraising the project to decide whether it should go ahead. The following information is relevant to your calculations.

(i)Market research has already been carried out at a cost of £1·2 million.

(ii)The services of a company specialising in animation will be required at a total cost of £520,000. 50% of these costs will be paid immediately with the remainder being paid in one year's time.

(iii)Two producers will be employed throughout the first year of the project. They will each be paid salaries of £120,000.

(iv)Other production costs during the year are expected to be £650,000.

(v)A film director will be employed immediately on a one-year contract at a cost of £160,000.

(vi)The animated film is expected to generate revenues of £1·2 million in the first year of sales, £2·2 million in the second year, and £1·6 million in the third year.

(vii)The two producers and the director will each be paid royalties from the film. These will be paid at the rate of 1·5% of gross revenues for EACH of the producers and 2% for the director. They will always be payable one year in arrears.

(viii)Specialist equipment will need to be purchased immediately for the film production. This will cost £2·3 million but can be sold at the end of the year for £1·7 million.

(ix)A loan for £1 million will be taken out to assist in financing the project. The loan will be repayable in two year's time, with interest of 8% per annum being payable for its duration.

(x)The company's cost of capital is 10% per annum.

(xi)Assume that all cash flows occur at the end of each year, unless otherwise stated.


(a)Calculate the project's net present value (NPV) at the company's 

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