Reference no: EM132964161

The Two-Bit Mining company has constructed a town at Big Bore, near the site of a rich mineral discovery in a remote part of Australia. The town will be abandoned when mining operations cease after an estimated 10-year period. The following estimates of investment costs, sales and operating expenses relate to a project to supply Big Bore with meat and agricultural produce over the 10-year period by developing nearby land.

a) Investment in land is $10 million, farm buildings $2,000,000 and farm equipment $4,000,000. The land is expected to have a realisable value of $5,000,000 in 10 years' time. The residual value of the buildings after 10 years is expected to be $500,000. The farm equipment has an estimated life of 10 years and a zero residual value.

b) Investment of $2,500,000 in current assets will be recovered at the termination of the venture.

c) Annual Cash sales are estimated to be $24.8 million.

d) Annual cash operating costs are estimated to be $22 million.

Problem 1: Is the project profitable, given that the required rate of return is 10% per annum?