Evaluating a potential project Sky Growth Ltd.'s ambitious finance manager provides the following information with regards to a possible new project and wants you to evaluate whether the company should proceed with the project.
Purchase price of equipment $6 million
Expected life of equipment 7 years
Tax depreciation of equipment $1 million p.a.
Scrap value of equipment after 7 years $350 000
Company tax rate 30% p.a.
Required rate of return 11% p.a.
Expected sales $3.0 million p.a.
Operating costs (excl. interest and depreciation) $1.5 million p.a.
Finance for the equipment 7-year bank loan with interest @ 9.5% p.a.
Prepare a detailed NPV analysis of the project and recommend whether the project should go ahead or not.