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The Titanic Shipbuilding Company is bidding on a contract to build an unsinkable ocean liner. Estimates of the project are as follows. The ship will
The Titanic Shipbuilding Company is bidding on a contract to build an unsinkable ocean liner. Estimates of the project are as follows. The ship will take three years to build. It will generate total revenue of $ million, paid in equal instalments of $ million, over the next three years. Payments will be received at the end of each year. The project will require immediate establishment of a new shipyard at a cost of $ million. The capital cost of the new yard can be depreciated at pa straightline. The yard can be sold in three years for an estimated $ million in real dollar terms. While working capital of $ million will be required from the outset, no additional allocation need be made to working capital, regardless of any escalation in other costs due to inflation. Working capital is also assumed to be fully recovered in real terms at the end of year three. Wages and other operating costs are estimated at $ million for the first year and are forecast to rise at the rate of inflation pa thereafter. These costs can be treated as though they occur at the end of each year. The real aftertax rate of return adjusted for risk required by Titanics management is Tax is payable at the rate of
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