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The Hawkins Co. Ltd has ordinary, Australian-resident shareholders and the company pays its profits as franked dividends which have a high utilisation factor in the hands of shareholders. The board of directors is considering a major investment to expand its highly technical facilities. The expansion will take a total of four years until it is completed and ready for operation. The following data and assumptions describe the proposed expansion:
a. To make this expansion feasible, R&D expenditures of $200,000 must be made immediately to ensure that the construction facilities are competitively efficient (t=0). b. At the end of the first year the land will be purchased and construction on stage 1 of the facilities will begin, involving a cash outflow of $150,000 for the land and $300,000 for the technical facilities.
c. Stage 2 of the construction will involve a $300,000 cash outflow at the end of year 2. d. At the end of year 3, when production begins, inventory will be increased by $50,000. e. The first sales from the operation of the new plant will occur at the end of year 4 and be $800,000 and continue at that level for ten years (with the final flow from sales occurring at the end of year 13). f. Operating costs on these sales are composed of $100,000 fixed operating costs per year and variable operating costs equal to 40% of sales. g. When the plant is closed, equipment will be sold for $50,000 and the land will be sold for $200,000 (t = 13).
Required
The company has a 12% required rate of return. What is the NPV of this project? Should it be accepted?
a. To make this expansion feasible, R&D expenditures of $200,000 must be made immediately to ensure that the construction facilities are competitively efficient (t=0). b. At the end of the first year the land will be purchased and construction on stage 1 of the facilities will begin, involving a cash outflow of $150,000 for the land and $300,000 for the technical facilities.
c. Stage 2 of the construction will involve a $300,000 cash outflow at the end of year 2. d. At the end of year 3, when production begins, inventory will be increased by $50,000. e. The first sales from the operation of the new plant will occur at the end of year 4 and be $800,000 and continue at that level for ten years (with the final flow from sales occurring at the end of year 13). f. Operating costs on these sales are composed of $100,000 fixed operating costs per year and variable operating costs equal to 40% of sales. g. When the plant is closed, equipment will be sold for $50,000 and the land will be sold for $200,000 (t = 13).
Required
The company has a 12% required rate of return. What is the NPV of this project? Should it be accepted?
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