Question 2 (10 marks)

CSU Green is a start-up company owned by environmental innovator Charles Sturt. The company is considering investing in a new project for its renewable energy business which will provide low cost, solar-powered electric motor vehicle charging stations throughout regional NSW. It has recently invested in (and successfully completed) a two-year $250,000 feasibility study on the project. A business analyst estimated that 1,000 of its new products could be sold annually over each of the next five years at a price of $60,000 each. Each charging station would cost $12,000 in materials and manufacturing costs. It is estimated that installation costs of an additional $4,000 per machine would be incurred. The company has estimate4d that annual fixed costs will be $12 million per annum. The initial outlay includes $100 million production facilities and $10 million in land. The facility will be depreciated using the prime cost method over the projects 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 $25 million. It is expected these sales proceeds will be received in Year 6. The firm pays taxes at a 30% rate in the year of income. Because of the riskiness associated with this project the firm applies a 15% discount rate on the new project and all CSU Green projects are assessed on an after-tax basis.

1. If CSU uses a 5 year payback period as a decision tool for capital budgeting would Charles Sturt accept or reject the project outlined in Question 1? (Show calculations) (5 marks).
2. Payback is still widely used in business as a method for choosing amongst investment alternatives. Outline some of the positive and negative aspects of using payback as a capital budgeting decision-making criteria. (5 marks)