ToneLock Ltd, security experts and lock manufacturers are considering entering into the

production of impenetrable combination safes. The company has called you, their trusted

financial advisor, to recommend whether to proceed with the project. The company tells you

that the cost of the machinery required to manufacture these safes is $560,000, with an

additional $40,000 to install. The machinery will be depreciated straight line on an annual

basis over its entire useful life of 4 years to a salvage value of $30,000. The company also

estimates that the building in which the machine is to be installed requires renovation

expenses of $25,000 if the company is to go ahead with the project, which for tax purposes

will be expensed at the beginning of the project.

The project will generate pretax revenues in the first year of $200,000, with revenues

expected to grow at a rate of 20% p.a., thereafter. Pretax expenses have been estimated to

be 15% of pretax revenues. ToneLock Ltd also believes that they can receive $10,000 for the

machinery at the end of its useful life. Given a required rate of return of 10% p.a. compounded

semiannually, and a corporate tax rate of 30%, do you recommend that ToneLock Ltd

proceed with this project and commence manufacturing impenetrable safes? Why or why

not? In answering this question, assume the initial investment is made today and cash flows

are received or paid as stated in the question.