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Scrap value of turbines is non-existent but there will be decommissioning costs incurred when a windfarm ceases to operate. If VFS closes the proposed new
Scrap value of turbines is non-existent but there will be decommissioning costs incurred when a windfarm ceases to operate. If VFS closes the proposed new windfarm at 30 June 2026, the decommissioning costs would be 200 million, and if VFS closes the proposed new windfarm at 30 June 2027, the decommissioning costs would be 700 million. These costs are assumed to be incurred at 30 June in the closure year (i.e. 2026 or 2027) and any tax implications of these decommissioning costs should be ignored. VFS's trading profits are chargeable to corporate tax at 21%, with the payment made in the year the profits are made. VFS has a weighted average cost of capital of 10%. Required 1. Using a net present value approach, evaluate if VFS should proceed withconstruction of the proposed new windfarm and, if so, advise which, if either, of the two closure dates should be chosen by the Board of Directors. Show all workings. (16 marks) 2. Calculate the decommissioning costs at 30 June 2027 that would make the Board ofDirectors indifferent as to which of the two possible closure dates to select. Show all workings. (2 marks) 3. Critically assess the use of expected values by the Board of Directors of VFS incalculating the expected revenue in the windfarm project
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