Outback Mining Group (OMG) has constructed a town at Black Stump (BS), near the site of a proposed mining development. The town will be abandoned when the mining operations cease after an estimated 10 year period. The following estimates of investment costs, sales, and operating expenses relate to a project to supply BS with meat and agricultural produce over the 10 year period by developing nearby land.
i. Investment in the land will be $1 million and is expected to have a realisable value of $500,000 in 10 years’ time.
ii. Investment in farm buildings will be $200,000 which have an estimated useful life of 20 years, at which time their book value would be zero. They are to be depreciated on a straight line basis for tax purposes based on this life. The realisable (sale) value of the buildings after 10 years is expected to be $50,000.
iii. Investment in farm equipment will be $400,000, and it has an estimated life of 10 years with zero realisable value at that time. The equipment is to be depreciated on a straight line basis.
iv. An investment of $250,000 in current assets (working capital) which will be recovered at the termination of the venture.
v. Annual cash sales are estimated to be $3 million.
vi. Annual cash operating costs are estimated to be $2.2 million.
vii. Assume tax is paid in the same year that the liability is incurred.
Given a tax rate of 30% and a required rate of return of 14.5%:
i. Compute the net present value (NPV)
ii. Compute the internal rate of return (IRR)
iii. Compute the payback period
iv. Compute the Profitability Index (PI)
v. Compute the modified rate of return (MIRR