As the financial advisor to All Star Manufacturing you are evaluating the following new investment in a manufacturing project: -

The project has a useful life of 8 years.

Land costs $10m and is estimated to have a resale value of $15m at the completion of the project.

Buildings cost $12m, with allowable depreciation of 6% pa reducing balance and a salvage value of $10m.

Equipment costs $5m, with allowable depreciation of 10% pa reducing balance and a salvage value of $1m. An investment allowance of 20% of the equipment cost is available.

Revenues are expected to be $15m in year one and rise at 5% pa.

Cash variable costs are estimated at 30% of revenue.

Cash fixed costs are estimated at $3m pa.

Managerial salaries of $800,000 will be allocated to the project, but these managerial positions will be unaffected by the acceptance of the project.

An amount of $200,000 has been spent on a feasibility study for the new project.

The project is to be partially financed with a loan of $13.5m to be repaid annually with equal instalments at a rate of 5% pa over 8 years.

Except for initial outlays, assume cash flows occur at the end of each year.

The tax rate is 30% and is payable in the year in which profit is earned.

The after-tax required return for the project is 11% pa.

Required

(a)Calculate the NPV.Is the project acceptable? Why or why not?

(b)Conduct a sensitivity analysis showing how sensitive the project is to revenues, fixed costs and to the required rate of return. Explain your results.