Question
Martin Heating Ltd is proposing the construction of a new plant in Thailand. It has recently completed a $300,000, two-year feasibility study on its latest
Martin Heating Ltd is proposing the construction of a new plant in Thailand. It has recently completed a $300,000, two-year feasibility study on its latest project. It estimated that 60,000 units of its new heat pump could be sold annually over the next ten years at a price of $30,000 each. Fixed costs of $5 million per annum will be incurred. The initial outlay includes $100 million to build production facilities and $30 million in land. The $100 million facility will be depreciated using the straight line method over the project's life (fully depreciated at the end of the project). At the conclusion of the project the facilities (including the land) will be sold for an estimated value of $60 million. The project will initially require an increase in net working capital of $2 million that will be recovered at the end of the project. Land value is expected to remain stable over the life of the project.
The firm is an ongoing profitable business and pays taxes at a 30% rate in the year of income. All capital gains will also be taxed at a rate of 30%. The company uses a 12% discount rate on the new project. Using the NPV approach, advise the firm whether the project should be undertaken (ignore any variable costs)
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