Jiayi Holdings Ltd imports wine from Australia into Singapore. It's considering an expansion in its business by also supplying Australian produced gins and whiskey to Singapore which are then sold to its distribution of alcohol merchants.

 To keep the costs down of supplying these new alcoholic lines of business the CFO, Limin, has worked on a plan to ensure the company's existing shipping costs can facilitate the additional produce in the freight space available. This will ensure shipping costs can be split between the wine and hard liquor lines, thereby delivering savings by cross-subsidizing the core wine business freight costs.

  Other than freight costs, there will be an initial cash outflow to 

 (i) cover the costs of hiring the marketing consultants that were used to determine there will be a demand for the hard liquor, 

 (ii) the purchase of a larger van, should the project go ahead, used to distribute both the wines and hard liquor to the merchants and 

 (iii) a 10-year hard liquor wholesale license. However, from year 1 there will be expected cash inflows and these are expected to grow within a three-year period as more merchants are expected to become interested in supplying Australian hard liquor to the market. 

 

The only additional costs that should be incurred will be additional employee time for delivering the extra line to merchants. By the fifth year, the previously bought van will likely need replacing and so the CFO uses this year to 'close' the project to avoid the costs of purchasing a new van.   

 Limin presents to the CEO a capital budgeting report to demonstrate the financial viability of the project using the estimated figures based on the above points. Unfortunately, Limin's calculations result in a net loss NPV proposition, suggesting the project should not go ahead.

Based on the information provided, do you think Limin's consideration of the above factors in determining his NPV calculation are fair? Discuss.