Reference no: EM132206456
Question - You are considering a new project that lasts four years.
Research cost - $6,000 (paid)
Cost of Asset - $80,000
Writing down allowances - 25% reducing balance on the cost of asset.
Residual value of asset - $20,000 in money terms.
Tax - 30% per annum payable one year in arrears.
Sales - 15,000 units in the first and second year. It then falls by 2,500 units per year in both third and fourth year.
Selling Price - $2.20 per unit in the first year. Expected to inflate by 3% annually.
Variable costs - $0.35 per unit in current terms. Expected to inflate by 5% annually.
Fixed costs - $0.15 per unit in current terms. Expected to inflate by 5% annually.
Working capital - 10% of expected sales. Investment should be done at the beginning of each year.
General inflation - 5%
Real cost of capital - 8.57%
Calculate the NPV of this project with detailed working notes and explanation and decide whether this project should be undertaken.
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