Reference no: EM132899890

Metal Winds Ltd is considering starting a project in New Zealand that involves the introduction of a new technology for developing small-sized windmills. It has been decided that the project will last for 5 years, given the uncertain future of this particular technology. Prior to starting the project Metal Winds Ltd has hired a consulting firm from Denmark to investigate the potential for wind energy in New Zealand. The consulting fee paid was $950,000. The consultants' report has persuaded the managers to go ahead with this project. The project requires purchasing new equipment for $18,800,000 and shipping and installation costs of $200,000.

The following information relates to the expected operating cash flows for each of the 5 years of the project:

Sales: $25,000,000
Cost of goods sold and operating expenses
(not including depreciation): $18,000,000

• The equipment will be depreciated straight-line over the 5 years of its useful life. At the end of the project the management expects to sell the equipment for $200,000 (this is pre-tax amount). Metal Winds expects to earn 8% rate of return (after tax) and the tax rate is 30%.

Required: (Show all workings)

Problem a) What is the project's initial investment?

Problem b) Calculate the project's free cash flow for years 1-5 (show workings).

Problem c) What is the net present value of this project? Should Metal Winds Ltd accept or reject this project? Explain your decision.