Calculations must be done by Excel

This question should be done using the method as outlined in lecture 6 (i.e. Tax Effects, then Cash Flows then NPV)

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 15 years.

- An amount of $150,000 has been spent on a feasibility study for the new project.

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

- Buildings cost $6 million, with allowable depreciation of 15% pa reducing balance and a salvage value of $ 1.5 million.

- Equipment costs $4 million, with allowable depreciation of 20% pa reducing balance and a salvage value of $0.9 million.

- An investment allowance of 20% of the equipment cost is available.

- The project is to be partially financed with a loan of $8.9 million to be repaid annually with equal instalments at a rate of 5% pa over 15 years.

- Projected sales for the new product are 100,000 units at $80 per unit in year one and rise at 4% pa.

- Cash operating expenses are estimated at $3 million in year one and rise at 2% pa.

- Addition net working capital of $50,000 is required immediately to support the project. Assume that this amount is recovered at the end of the 15-year life of the project.

- The new product will be charged $450,000 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage the project.

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 12% pa.

Required

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

Explain your calculation of relevant net cash flows after tax, justifying your selection of cash flows. Be sure to state clearly any assumptions made