Ecorev Industries is considering a proposal to manufacture disposable organic food\ containers. The project would make use of an existing warehouse, which the company is\ currently renting out to a neighbouring firm. The rental charge on the warehouse is\

$1,00,000

, and thereafter the rent is expected to grow in line with inflation at

4%

a year. In\ addition to using the warehouse, the proposal envisages an investment in plant and\ equipment of

$120,00,000

, which would depreciate over 5 years using the straight-line\ method. The company expects to terminate the project at the end of 5 years and dispose-off\ the plant and equipment for

$400,000

. Finally, the project requires an initial investment in\ working capital of

$350,000

. Year 1 sales are expected to be

$60,00,000

, and thereafter sales\ are forecasted to grow by

5%

a year, slightly faster than the inflation rate. Manufacturing\ costs are expected to be

45%

of sales, and profits are subject to tax at

25%

. The cost of\ capital is

12%

. Is the project financially viable?\ (10 marks)

Ecorev Industries is considering a proposal to manufacture disposable organic food containers. The project would make use of an existing warehouse, which the company is currently renting out to a neighbouring firm. The rental charge on the warehouse is $1,00,000, and thereafter the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $120,00,000, which would depreciate over 5 years using the straight-line method. The company expects to terminate the project at the end of 5 years and dispose-off the plant and equipment for $400,000. Finally, the project requires an initial investment in working capital of $350,000. Year 1 sales are expected to be $60,00,000, and thereafter sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs are expected to be 45% of sales, and profits are subject to tax at 25%. The cost of capital is 12%. Is the project financially viable