Your company owns and manages several ports and is considering investing in a new project to expand the capacity of a coal terminal. The project requires an investment of $65m, of which $15m is depreciable equipment. A further $5m investment is projected for 5 for equipment upgrade (assume it is fully depreciated by the end of the year project). The project lifespan is 10 years. It is estimated that the equipment will have no salvage value after 10 years. The projected sales revenues from the project in years 1 and 2 are $9.5m and $13.2m. The sales are projected to grow at 7% per annum after year 2. The operating costs for year 1 are $635,000. The costs are projected to grow at 9% per annum. The current costs of capital for your company are 4.25% for debt and 11.7% for equity, and the current ratios are 60% debt and 40% equity. The company is Australian. The corporate tax rate is 30%. a) What is the NPV for this project? b) What is the rate of return for this investment? c) Should the company invest in this project? Why?
Your company owns and manages several ports and is considering investing in a new project to expand the capacity of a coal terminal. The project requires an investment of $65m, of which $15m is depreciable equipment. A further $5m investment is projected for 5 for equipment upgrade (assume it is fully depreciated by the end of the year project). The project lifespan is 10 years. It is estimated that the equipment will have no salvage value after 10 years. The projected sales revenues from the project in years 1 and 2 are $9.5m and $13.2m. The sales are projected to grow at 7% per annum after year 2. The operating costs for year 1 are $635,000. The costs are projected to grow at 9% per annum. The current costs of capital for your company are 4.25% for debt and 11.7% for equity, and the current ratios are 60% debt and 40% equity. The company is Australian. The corporate tax rate is 30%. a) What is the NPV for this project? b) What is the rate of return for this investment? c) Should the company invest in this project? Why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Your company owns and manages several ports and is considering investing in a new
project to expand the capacity of a coal terminal. The project requires an investment of
$65m, of which $15m is depreciable equipment. A further $5m investment is projected
for year 5 for equipment upgrade (assume it is fully depreciated by the end of the
project). The project lifespan is 10 years. It is estimated that the equipment will have no
salvage value after 10 years.
The projected sales revenues from the project in years 1 and 2 are $9.5m and $13.2m.
The sales are projected to grow at 7% per annum after year 2. The operating costs for
year 1 are $635,000. The costs are projected to grow at 9% per annum.
The current costs of capital for your company are 4.25% for debt and 11.7% for equity,
and the current ratios are 60% debt and 40% equity. The company is Australian. The
corporate tax rate is 30%.
a) What is the NPV for this project?
b) What is the rate of return for this investment?
c) Should the company invest in this project? Why?
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