The ARB 4WD Accessories firm is trying to evaluate a capital budgeting project based in its growing export market of Thailand. All figures quoted in this case study are expressed in $AUD.

 

ARB has recently completed a $200,000, two-year study on its latest project. It estimates that 5,000 of its new Toyota Land Cruiser canopy sets could be sold annually over the next ten years at a price of $8,550 each. Each canopy would incur construction costs of $2,500 and subcontractors would install the canopy at a cost of $2,200 per installation. Additional fixed costs of $10 million per annum will be incurred. The initial outlay includes $30 million to build production facilities and $2 million in land. The new facility will be depreciated using the prime cost method over the project's life (fully depreciated at the end of the project). At the conclusion of the project the facilities (including the land) will be sold for an estimated value of $10 million. 

 

The firm is an ongoing profitable business and pays taxes at a 30% rate in the year of income. It uses a 12% discount rate on the new project. Using the NPV approach, advise the firm whether the project should be undertaken.

Answer rating: 100% (QA)

To determine whether the project should be undertaken we need to calculate the net present value NPV ... View the full answer