Green Energy Company has recently completed a $220,000, two-year study on its latest project, ‘Roof-top Solar”....

Green Energy Company has recently completed a $220,000, two-year study on its latest project, ‘Roof-top Solar”. It estimated that 28,000 units of its new Roof-top Solar units could be sold annually over the next 10 years at a price of $6,580 each. Subcontractors would install the unit at a cost of $4,700 per installation. Fixed costs of $11 million per annum will be incurred.

The initial outlay includes $52 million to build production facilities and $4.2 million in land. The $52 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 $12.5 million. The land value is expected to increase by 1.5 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 10% discount rate on the new project.

Using the NPV approach, decide whether the project should be undertaken or not.

Solutions

Expert Solution

Calculation of Project's Net Present Value

Since the NPV is positive, hence the project should be accepted.

jeff jeffy answered 1 year ago

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