The Tenby-Saundersfoot Dock company is considering the reopening of one of its mothballed loading docks. Repairs and new equipment will cost £250,000 payable immediately. To operate the new dock will require additional dock-side employees costing £70,000 per year. There will also be a need for additional administrative staff and other overheads such as extra stationery, insurance and telephone costs amounting to £85,000 per year. Electricity and other energy used on the dock is anticipated to cost £40,000 per year. The London head office will allocate £50,000 of its (unchanged) costs to this project. Other docks will experience a reduction in receipts of about £20,000 per year due to some degree of cannibalization. Annual fees expected from the new dock are £255,000 per year.
Assume
- all cash flows arise at the year ends except the initial repair and equipment costs which are incurred at the outset;
- no tax or inflation;
- no sales are made on credit.
a. Lay out the net annual cash flow calculations. Explain your reasoning.
b. Assume an infinite life for the project and a cost of capital of 17 per cent. What is the net present value?