The Tenova Company is evaluating the possibility of reopening of one of its mothballed loading docks. Repairs and new equipment will cost R250 000 payable immediately. To operate the new dock will require additional dock- side employees costing R70 000 per year. There will also be a need for additional administrative staff and other overheads such as extra stationery, insurance and telephone costs amounting to R85 000 per year. Electricity and other energy used on the dock is anticipated to cost R40 000 per year. The Johannesburg head office will allocate R50 000 of its (unchanged) costs to this project. Other docks will experience a reduction in receipts of about R20 000 per year due to some degree of cannibalisation. Annual fees expected from the new dock are R255 000 per year. Assume – all cash flows arise at the year ends except the initial repair and equipment costs which are incurred at the outset; – no tax or inflation; – no sales are made on credit.
1. Lay out the net annual cash flow calculations. Explain your reasoning.
2. Assume an infinite life for the project and a cost of capital of 17 per cent. What is the net present value?