A private firm wishes to examine the profitability of constructing a phosphate fertilizer plant. The project will produce 10,000 tons of fertilizer per year, which will be sold in the domestic market for RM550 per ton. It is expected to have a 5 year life.
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Investment in plant and equipment will cost RM5 million. The plant can be sold for RM1 million at the end of the project life.
The plant will need 100 production workers and 20 office and managerial staff. The average wage for production workers is RM800 per month, while that for management staff is RM2,000 per month. Raw materials will be RM20 per ton of output produced while utilities will cost RM5 per ton of output.
The firm has a private discount rate of 10%. Calculate the net present value of the project. Based on the result, suggest the next course of action for the firm.