Financial Management 1 answer below »
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Question 1: Company looking to build ship. Estimates of project are. Ship will take 3 years to build. Ship will generate total revenue of $45million paid, in equal instalments of $15million, over 3 years (payments received at the end of each year). Project will require immediate establishment of new shipyard at cost of $6million. Capital cost of new yard can be depreciated at 20% p.a. straight line. The yard can be sold in 3 years for estimated $3million. Wages and other operating costs are estimated at $8million each year. These costs can be treated as though they occur at the end of each year. The real after tax rate of return (adjusted for risk) required by ship company is 10%. Tax is payable at the rate of 30%.
a. set our the cash flows of the project
b. calculate the payback period of the project
c. calcuate the NPV of the project
d. based on your results in b and c explain whether the project is worth doing
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