Capital Budgeting;
You are the CEO of a building company.
A study that cost $3,000 (paid last month) estimated the following if the project proceeds.
- The fully depreciated storage shed that is currently on the build site will be sold for $5000.
• The new building will cost $80,000 to build. According to tax regulations, you should fully depreciate this villa over 20 years.
- Revenue will increase by 15,000 per year if the project is undertaken.
- The operating expenses will increase by $4,000 per year.
Assuming the cost of capital is 7% per annum and the relevant corporate tax rate is 40%:
a) Calculate the net initial investment.
b) Calculate the annual net cash flows.
c) Calculate the NPV of the new villa project.
d) Calculate the payback period of the new villa project.
e) Do you recommend the new project? Briefly explain your reasoning.