Reference no: EM133074268

Anele Mguni Holdings is contemplating to start a project by buying an excavator that has a useful life of 4 years and will cost $400,000, installation cost of $25,000, each year current assets and current liabilities will increase by $50,000 and $30,000 respectively. The machine will require fixed costs for maintaining and servicing at $85,000 per year over its useful life. The project will involve servicing stands that are currently sold for $500,000 while variable costs are $200,000 per stand.

The company is operating in an inflationary environment where yearly selling inflation is predicted at 8% and 5% cost inflation. Corporate tax rate is 25.75% and is paid one year in arrears.

The company's after-tax cost of capital is 10%. Capital allowances are granted on a reducing balance basis at a rate of 20% and the machine has a disposable value of $100,000.

Calculate the Net Present Value (NPV) of the project, advise Anele whether to start the project or not basing on this method.