Question $2($Capital budgeting$)$

$[$All final answers should be rounded to the nearest $$.]$

Woodland Furniture $($WF$)$ is a firm producing wooden furniture for household uses. WG is now considering constructing a new production facility in Indonesia. The existing production facility will be closed if the project is to go ahead. The facility will be built on a piece of land located in the forest that WF has just purchased at $$10$ million for the purpose. The land is expected to be worth $$2$ million at the end of the project. WF uses a ten$-$year planning horizon for all of its capital budgeting decisions.

The production facility will be constructed at a cost of $$12$ million. It will be depreciated at its full costs on a straight$-$line basis over its estimated useful life of $10$ years, and its salvage value is $$4$ million. Machinery will also be purchased at a cost of $$6$ million. The machinery will also be depreciated at its full costs on a straight$-$line basis over its estimated useful life of $10$ years. Its salvage value is $$500,000.$ In addition, an initial investment of $$2$ million working capital is required. The working capital will be fully recovered at the end of the project.

Current annual pre$-$tax cash income of $$4$ million from the existing production facility and WF expects that with the production facility, annual pre$-$tax cash income will be $$6$ million in each of the next $10$ years. WF$\text{'}$s corporation tax rate is $25\%,$ and its weighted average cost of capital is $8\%.$

$($a$)$ Calculate the cost of investment.

$(5$ marks$)$

$($b$)$ Calculate the present value of after$-$tax cash operating income.

$(5$ marks$)$

$($c$)$ Calculate the present value of tax savings from depreciation for the production facility

$(5$ marks$)$ and machinery.

$($d$)$ Calculate the present value of after$-$tax salvage value for the production facility, machinery and the piece of land.

$(5$ marks$)$

$($e$)$ Based on the net present value $($NPV$)$ method, should the project be undertaken? $(5$ marks$)$

$($f$)$ Briefly discuss how the NPV figure affects the common shareholders.

$(5$ marks$)$

$($Total: $30$ marks$)$