Ruby Brothers is considering a project where they would open a new facility in the Gold Coast. The company's CFO has assembled the following information regarding the proposed project:
To purchase the equipment required to undertake the project it will cost $450,000 today (at t = 0), and there will be a 15% cost to assemble the plant in a building that could otherwise be sold for $200,000. The cost of the facility will be depreciated on a straight-line basis over six years. The CFO has estimated that the project will generate revenues of around $1.4 million over the next four years:
Operating costs excluding depreciation are expected to equal 65 percent of revenue. If the company opens the facility, it will need to increase its working capital by $100,000 at t = 0.
The company plans to abandon the facility after four years. At this time, the project's estimated salvage value will be $325,000, and it will pay a 10% commission to the agent who handles the decommissioning of the project. The company will also recover the working capital investment that it made at t = 0.
The project will be evaluated using the WACC calculated in Question 2 above. (WACC=10.16%)
The company's tax rate is 35 percent.
Should the company proceed with the project?