Steel Ltd. is considering a 5 year project to manufacture steel containers  .The project requires the purchase of land at a cost of $1.75 million, and the value of the land is expected to increase at an average rate of 3% per annum into the foreseeable future .The project will also require an initial investment of $1.25 million comprising $1 million for a new building and $250,000 for new equipment .The building is expected to be worth $650,000 at the end of the project and the equipment is expected to have a salvage value of $30,000. The company has recently conducted a feasibility study at a cost of $60,000.According to the study the company will be able to generate cash flows of $550,000 before tax over the 5 year period .The company's tax rate is 40%, its weighted average cost of capital is 15% and the applicable CCA rate is 20% on the equipment and 12% on the buildings .Other requirements for the project are start up costs of $60,000 which are fully deductible and an investment of $20,000 in net working capital.

Required:

Using the net present value (NPV) method, evaluate whether the project should be undertaken.

Answer rating: 100% (QA)

To evaluate whether the project should be undertaken using the net present value NPV method well calculate the present value of all cash flows associa... View the full answer