Question 8

VWX Ltd. is considering an expansion project with an initial cost of $5 million. The expansion is expected to generate additional revenue of $1 million per year for the next 10 years, with annual operating costs of $400,000. The equipment will have a salvage value of $200,000 at the end of its useful life. The company’s tax rate is 24%, and the discount rate is 9%.

Requirements:

1. Calculate the NPV of the project.
2. Determine the IRR.
3. Compute the payback period.
4. Evaluate the effect of a 5% decrease in revenue on the NPV.
5. Advise whether the project should be undertaken.