Huonville Farming Co. Ltd (HFC) is a company in the aquacultural industry that specialises in farming aquatic organisms. HFC is considering opening a new farm near Huon Valley. This project would involve the purchase of 25 hectares of land at a price of $2,000,000 (Note that: The land is not subject to depreciation for accounting and tax purposes). In addition to that, the company will need to purchase ten special heavy equipment which cost $240,000 each. The equipment is expected to be in use for 6 years and after that, it will be scrapped without any residual value. Each piece of equipment will incur a $15,000 maintenance cost per year. It is assumed that the farm will first be in operation at the beginning of the next financial year: 1 July 2023.

Before starting this new operation, HFC will need to redevelop and renovate the warehouse at the farm. This is expected to cost $450,000. It also paid $50,000 for the farm design and market research. Also note that if HFC is not running its own farm in the new lot of land, it can rent it out for $72,000 per year. Assume that HFC cannot claim any annual tax deduction for the capital expenditure on the renovation of the building until the business is sold.

To start the operation of the new farm, HFC also needs to invest $85,000 in the net working capital which will be returned in half by the end of the project.

Revenue projections from the farm for the next five years are as follows:

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Beginning	1/7/2023	1/7/2024	1/7/2025	1/7/2026	1/7/2027	1/7/2028
Ending	30/6/2024	30/6/2025	30/6/2026	30/6/2027	30/6/2028	30/6/2029
Production quantity (in tonnes)	280	300	310	305	290	290
Price (per ton)	$9,110	$9,175	$9,225	$9,280	$9,350	9,360

Operating variable costs associated with the new business include material and labor costs. Estimated material costs of $2,080 per ton in year 1 and this cost will increase by 3.5% every year. The farm will require about 10 workers working for 8 hours a day, 200 days per year. The pay rate is flat at $35/ hour including superannuation. Annual operating fixed costs associated with production (excluding depreciation) are $250,000. Existing administrative costs are $550,000 per annum. As a result of the new operation, these administrative costs will increase by 40%. The company is subject to a tax rate of 30% on its profits.

Meanwhile, HFC is currently financed by 60% of equity and 40% of debt. The companys bond is traded at a price of $980. This bond has a 10-year term, 8% coupon rate paid semi-annually, and a face value of $1,000. It was issued to the market 2 years ago. In addition, the companys equity has a beta of 1.2.

Catherine, the company CFO would like you to help her examine the viability of the project for the next five years, taking into account the projections of sales and operations costs prepared by companys accountants.

Q1. Calculate the projects net present value (NPV), assuming that the initial investment could be sold at the end of the six years for $1.2 million (excluding the land and including the machine, the warehouse, and other facilities on the farm). Briefly comment on your results and make appropriate remarks on the assumptions made for these calculations if necessary.

Q2. Estimate the projects internal rate of return (IRR). Briefly comment on your results

Q3. Using sensitivity analysis, recalculate NPV using the scenario of

A) A decrease in project sales quantity by 10% annually.

B) An increase of the sale price by 5% annually

C) An increase in material costs change from 3.5% to 4.5%

D) An inflation rate of 3% p.a

Briefly comment on the risk factors identified in the sensitivity analysis.