The project has a useful life of 10 years. Land costs $5m and is estimated to...

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The project has a useful life of 10 years. Land costs $5m and isestimated to have a resale value of $7m at the completion of theproject. Buildings cost $4m, with allowable depreciation of 5% pastraight-line and a salvage value of $0.8m. Equipment costs $3m,with allowable depreciation of 20% pa straight-line and a salvagevalue of $0.4m. An investment allowance of 20% of the equipmentcost is available. Revenues are expected to be $5m in year one andrise at 10% pa. Cash expenses are estimated at $2m in year one andrise at 5% pa. The new product will be charged $300,000 ofallocated head office administration costs each year even thoughhead office will not actually incur any extra costs to manage theproject. An amount of $200,000 has been spent on a feasibilitystudy for the new project. The project is to be partially financedwith a loan of $6m to be repaid annually with equal instalments ata rate of 5% pa over 10 years. Except for initial outlays, assumecash flows occur at the end of each year. The tax rate is 30% andis payable in the year in which profit is earned. The after taxrequired return for the project is 10% pa.

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4.0 Ratings (575 Votes)

To ascertain the feasibility of the Project we need to discountthe Cashflows of the Project at See Answer

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Transcribed Image Text

The project has a useful life of 10 years. Land costs $5m and isestimated to have a resale value of $7m at the completion of theproject. Buildings cost $4m, with allowable depreciation of 5% pastraight-line and a salvage value of $0.8m. Equipment costs $3m,with allowable depreciation of 20% pa straight-line and a salvagevalue of $0.4m. An investment allowance of 20% of the equipmentcost is available. Revenues are expected to be $5m in year one andrise at 10% pa. Cash expenses are estimated at $2m in year one andrise at 5% pa. The new product will be charged $300,000 ofallocated head office administration costs each year even thoughhead office will not actually incur any extra costs to manage theproject. An amount of $200,000 has been spent on a feasibilitystudy for the new project. The project is to be partially financedwith a loan of $6m to be repaid annually with equal instalments ata rate of 5% pa over 10 years. Except for initial outlays, assumecash flows occur at the end of each year. The tax rate is 30% andis payable in the year in which profit is earned. The after taxrequired return for the project is 10% pa.