Question
Pawsey Pump Manufacturing Ltd has recently completed a comprehensive $250,000, two-year market research project into the feasibility of their innovative new irrigation pump designed for
Pawsey Pump Manufacturing Ltd has recently completed a comprehensive $250,000, two-year market research project into the feasibility of their innovative new irrigation pump designed for use in the Murray Darling Irrigation basin. The pump was developed as part of the ongoing research and development at Pawsey Pumps in which more than $500,000 was spent developing and testing the prototype. The pump is innovative because it draws large volumes of water but avoids killing large numbers of native fish through use of a patented filter system. It is planned that the pump will be manufactured in a purpose-built manufacturing facility. The market research report found that 2,500 units of the patented irrigation pump could be sold annually over the next ten years at a price of $20,000 each. Pawsey Pump Manufacturing plans to outsource pump installation to subcontractors who would install each pump at a cost of $7,500 per installation. Fixed costs of $20 million per annum will be incurred at the manufacturing facility. The initial outlay will include $50 million to build production facilities and $5 million for land where the factory will be sited. The $50 million facility will be depreciated using the prime cost method over the projects 10-year life (fully depreciated at the end of the project). At the conclusion of the project the land and facilities will be sold for an estimated value of $10 million. The firm is an ongoing profitable business and pays taxes at a 30% rate in the year of income. It uses a 15% discount rate on the new project. U sing the NPV approach, advise the firm whether the project should be undertaken.
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