The project has a useful life of 10 years.

Land costs $5m and is estimated to have a resale value of $7m at the completion of the project.

Buildings cost $4m, with allowable depreciation of 5% pa straight-line and a salvage value of $0.8m.

Equipment costs $3m, with allowable depreciation of 20% pa straight-line and a salvage value of $0.4m. An investment allowance of 20% of the equipment cost is available.

Revenues are expected to be $5m in year one and rise at 10% pa.

Cash expenses are estimated at $2m in year one and rise at 5% pa.

The new product will be charged $300,000 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage the project.

An amount of $200,000 has been spent on a feasibility study for the new project.

The project is to be partially financed with a loan of $6m to be repaid annually with equal instalments at a rate of 5% pa over 10 years.

Except for initial outlays, assume cash flows occur at the end of each year.

The tax rate is 30% and is payable in the year in which profit is earned.

The after tax required return for the project is 10% pa.

Required

(a)Calculate the NPV.

(b)Conduct a sensitivity analysis showing how sensitive the project is to revenues, cash expenses and to the cost of capital. Explain your results.