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A company is evaluating the possibility of 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 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 cannibalisation. 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.
1. Lay out the net annual cash flow calculations. Explain your reasoning.
2. Assume an infinite life for the project and a cost of capital of 17%. What is the net present value?
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Compute the PV of the expected cash flows
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The contribution margin per unit is equal to the
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