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As the financial advisor to Beena you are evaluating the following new investment in a project. The project has a useful life of 12 years.

As the financial advisor to Beena you are evaluating the following new investment in a project.

The project has a useful life of 12 years.

Land costs $6m and is estimated to have a resale value of $10m at the completion of the project.

Buildings cost $5m, with allowable depreciation of 10% pa reducing balance and a salvage value of $0.9m.

Equipment costs $4m, with allowable depreciation of 20% pa reducing balance and a salvage value of $0.5m. An investment allowance of 20% of the equipment cost is available.

Revenues are expected to be $7m in year one and rise at 5% pa.

Cash expenses are estimated at $3m in year one and rise at 3% pa.

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.

A) Explain how the depreciation is calculated the right way (with or without the use of the salvage value)

B) Calculate the NPV? Is the project acceptable? Why or why not?

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