Question :
ABC Shipping provides ferry services in Australia. It is considering a project of buying a new vessel for an extra service. The estimated cost of the new vessel is $5 million. The annual cash flows for the next eight years are expected to be as follows:
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Revenues
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$5 million per annum
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Promotional costs
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$1 million in the first year
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Operating costs
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3 million per annum (excluding depreciation)
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Other overheads
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0.4 million per annum
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At the end of the eight years, the vessel is expected to be worth $1 million. The company's required rate of return on investment projects is 20%. What is the Net Present Value (NPV) of this project? Should this project be accepted?