separately calculate the NPV for the existing and the proposed project

For many years Sydney Harbour Fuel (SHF) has been an icon for professional and recreational boaters alike. Their brightly coloured fuel vessels have been delivering and selling petrol and light diesel fuel directly to customers all around Sydney Harbour. Dino Dotson originally started the service when he first migrated to Australia in the 1950s. While no longer working full time, Dino is still seen to occasionally deliver fuel to many of his favourite and long serving loyal customers. Dino does not accept any wages from the business for this help. If he did accept wages his contribution would be worth $15,000 per year. The business is now run by his son Don Dotson and his wife Daisy Dotson. They have three children named Dolly, Debra and Dana. Dana is currently enrolled at University of Wollongong. With this knowledge she is advising her parents and siblings as to ways in which to grow the business. Five years ago they purchased 4 new vessels for $2 million each which they are able to depreciate for tax purposes at 10% per annum straight-line. At this time (i.e., five years ago), 4 vessels were sold and four others had extensive renovations. This meant the renovated vessels had a useful life of 8 years and a value for taxation depreciation purposes of $400,000 each. They are able to be depreciated for tax purposes for 8 years straight line. In recent times there has been a move away from the use of petrol in nautical vessels with most using light diesel. Due to the failure of a competitor there is also the opportunity to now supply heavy diesel to the fleet of cruise liners that regularly visit Sydney harbour. They would not have to tender for this work as they have been offered the contract, as they are the only fuel vessel company still in operation on Sydney harbour. If the expected project goes ahead these above mentioned vessels can be sold today for 20% of their original cost. For taxation purposes the full amounts of the tax base are depreciated with no allowance for residual value. The vessels purchased five years ago are expected to have a salvage value of $100,000 each at the end of their 10 year useful life and the renovated vessels a salvage value of $50,000 each at the end of their 8 year useful life. If the existing operation continues, these vessels can be sold for the salvage values at the end of their respective useful life. To be able to take advantage of this contract the company will have to sell its existing vessels and invest in 8 new vessels. These new vessels will cost $4 million each. Their accountant has advised that these can be depreciated straight-line at 5% per annum while their tax advisor has advised that they can be depreciated for 2 10 years on a straight-line basis. They can be sold at the end of their useful lives for 15% of their purchase price. The benefit of the new vessels is that they will have the necessary technology to be able to carry and pump both light and heavy diesel. The one downside is that they will no longer be able to sell petrol. As they are no longer distributing petrol, their insurance company has advised that their insurance premiums will fall by $2,000 per year from the first year of operation. A feasibility study has been completed by Woodward & Associates to assess the likely demand for fuel for the next 10 years. They expect that there will be a demand for 5 million litres of light diesel and 10 million litres of heavy diesel in the first year. Demands for both light diesel and heavy diesel are expected to grow at 5% annually. The margin on the sale of fuel is expected to be $2 per litre delivered in the first year and grow annually at a rate that is 1% above the inflation rate. Previously they were supplying 2 million litres of petrol and 4 million litres of light diesel per annum. The cost of this report was $25,000. With the move to heavy diesel it is estimated that they will hold $1 million worth of heavy diesel inventory and $500,000 worth of light diesel. This is an increase from the previous figure of $350,000 of light diesel inventory held. They will no longer need to hold the $50,000 worth of petrol as they normally did. This can be sold for this value if they go ahead with the project. In addition, the new project will require a net working capital investment of 5% of sales gross margin. The NWC will be built up in the year prior to the sales. NWC remaining at the end of the project can be fully recovered at that time. If the project goes ahead they will not need as many staff as they previously did. The jobs of two captains and two maintenance workers will no longer be required. This will save the company a total of $240,000 per year. In light of the fact that these workers are being retrenched they will receive a redundancy payment at the very start of the project of 50% of their annual wage. Presently Don Dotsons wage is $150,000 and Daisys is $50,000. If the new project goes ahead the company will pay Don $100,000 per annum and Daisy also $100,000 per annum. To facilitate the purchase of the 8 new vessels the company will borrow $32 million from Seeto Bank at an interest rate of 7.5% per annum. The current rate of inflation is 1.5% per annum and is expected to remain constant over the course of the project. The companys required rate of return is 11.5% per annum on a project such as this one. The corporate tax rate is 30%. You are asked to evaluate the proposal to purchase the new vessels. 3 In terms of the structure of the report, below are the minimum requirements: 1. Atthe beginning of the report, clearly state which decision criterion/criteria you use and your decision; 2. In the report, also clearly show your calculations (on cash flow basis), e.g., initial investment, depreciation, EBIT, etc. An Excel exemplar will be provided separately. 3. Include a worksheet in your report. You can take a screenshot of an Excel worksheet and paste it in your report, or you can embed a table in your report. The worksheet must be legible or penalty will be imposed. 4. Conduct sensitivity analysis for the following: demand of diesel, margin on sales of fuel, and salvage value for the new vessels.