Reference no: EM132422059

Problem:

• Park first is a listed company undertaking a project to build a decontamination plant to improve the health of the Macquarie river.
• The life of the project is expected to be five years.
• The initial investment in the project today is $500,000.
• The plant will be depreciated on a straight-line basis to a $0 book value over the five years and it can be sold in year five for $300,000.
• Park first will receive revenues of 180,000 per year from the local council over the next five years (starting at the end of the first year).
• The annual variable cost is expected to be 30% of annual revenues.
• The company pay tax rate is 30%.
• The cost of capital for the project is 9%.
• Park first want to recover its initial investment before the next election in two years because they are uncertain what will happen to the arrangement with council after that.

Question 1: Calculate the free cash flows for this project (Use the table below).

Revenue

Variable cost

Depreciation

EBIT

Tax

Net income

Add; Depreciation

Cap Expenditure

Salvage value

Free Cash flow

Present value

Question 2: What is NPV of this project?

Question 3: Should Park First undertake this project based on your analysis? Explain why or why not?

Question 4: If Park First was able to obtain Cheaper financing for this project, what effect would this have on the NPV to calculated In part 2 and your decision in part 3? Explain why?

Question 5: Identify one other capital budgeting method (besides NPV) that park first should consider. Explain Why?

Question 6: Identify and then comment on some possible problems with your analysis. how do you think you can improve your analysis?