Advanced Tech Ltd is proposing the construction of a new plant in Singapore. It

Question

Advanced Tech Ltd is proposing the construction of a new plant in Singapore. It has recently

completed a $3,000,000, two-year feasibility study on its latest project. It estimated that 50,000 units

of its new geothermal heat pump could be sold annually over the next ten years at a price of $30,000

each. Subcontractors would install the pump at a cost of $5,000 per installation. Fixed costs of $5

million per annum will be incurred. The initial outlay includes $100 million to build production

facilities and $30 million in land. The $100 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 $50 million.

The firm 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, determine whether the project should be undertaken (use the tax

rate provided in your analysis).

Explanation / Answer

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