Jean Smith, the financial advisor to Creative Manufacturing is 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 $13m at the completion of the project.

Buildings cost $5m, with allowable depreciation of 10% pa reducing balance and a salvage value of $1m.

Equipment costs $4m, with allowable depreciation of 30% pa reducing balance and a salvage value of $1.5m. An investment allowance of 20% of the equipment cost is available.

Revenues are expected to be $8m for the first 4 years and $9m for the next 4 years.

Cash expenses are estimated at $4m in year one and rise at 4% pa.

The new product will be charged $400,000 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage the project.

An amount of $100,000 has been spent on a feasibility study for the new project.

The project is to be partially financed with a loan of $10m 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 12% 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, the resale value of the land and to the required rate of return. Explain your results.