KIWICO is a New Zealand-based company with 25% holding by overseas investors. It
ID: 2666287 • Letter: K
Question
KIWICO is a New Zealand-based company with 25% holding by overseas investors. It has recently completed a $200,000, two-year study on its latest project. It estimated that 20,000 of its new geothermal heat pump could be sold annually over the next ten years at a price of $8,521 each. Subcontractors would install the pump at a cost of $6,200 per installation. Fixed costs of $10 million per annum will be incurred.
The initial outlay includes $60 million to build production facilities and $2.4 million in land. The $60 million facility will be depreciated using the prime cost method over the project’s life (fully depreciated at the end of the project). At the conclusion of the project the facilities (including the land) will be sold for an estimated value of $12 million. The land value is expected to increase by 1 per cent annually over the project period.
The firm is an ongoing profitable business and pays taxes at a 30% rate in the year of income. It uses a 12% discount rate on the new project. Using the NPV approach, advise the firm whether the project should be undertaken.
Explanation / Answer
Using NPV approach this project company can undertake because of positive NPV value was occurred
Calculation:-
Total income
8521*20000 =
170420000
Total costs
6200*20000 + 10000000 =
134000000
Cash out flows
60000000+2400000 =
62400000
Deprecation amount
60000000-12000000/10years
58800000
Total earnings
Total income-Costs
36420000
Less tax on 36420000 =
10926000
Total earnings
25494000
Cash inflows
Total earnings + DEP
25494000+58800000 =
84294000
NPV
Inflows-outflows
84294000-62400000 =
21894000
Total income
8521*20000 =
170420000
Total costs
6200*20000 + 10000000 =
134000000
Cash out flows
60000000+2400000 =
62400000
Deprecation amount
60000000-12000000/10years
58800000
Total earnings
Total income-Costs
36420000
Less tax on 36420000 =
10926000
Total earnings
25494000
Cash inflows
Total earnings + DEP
25494000+58800000 =
84294000
NPV
Inflows-outflows
84294000-62400000 =
21894000
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