A mining company has constructed a town near the site of a richmineral discovery in a remote part of Australia. It is expected themineral deposit will be exhausted in 10 years and mining operationswill cease and the town will be abandoned after the 10-year period.You have been asked by an agricultural company to evaluate anassociated project that involves supplying the mining town withmeat and agricultural produce for the 10-year period by developingnearby land. Costs, sales and operating expenses relating to theproject are: 1) Investment in land is $1,000,000, farm buildings$200,000 and farm equipment $400,000. 2) The land is expected tohave a realisable value of $500,000 in 10 years. 3) The buildingshave an estimated life of 20 years at which time their salvagevalue would be zero. They are to be depreciated on a straight line(prime cost) basis for tax purposes based on this life. The salvagevalue of the buildings after 10 years is expected to be $50,000. 4)The farm equipment has an estimated life of 10 years and a zerosalvage value. The equipment is to be depreciated on a straightline (prime cost) basis for tax purposes based on this life. 5)Investment in working capital is $250,000. This will be recoveredat the end of the project’s life. 6) Annual cash sales areestimated to be $3,000,000. 7) Annual cash operating costs areestimated to be $2,200,000 8) Assume tax is paid one year after theyear of income 9) The company tax rate is 39 per cent 10) Thecompany required rate of return after-tax is 10 per cent.

Required: Should the agricultural company undertake theproject?