1 The Tenby-Saundersfoot Dock company is considering the reopening of one of its mothballed loading.

1 The Tenby-Saundersfoot
Dock company is considering the reopening of one of its mothballed loading
docks. Repairs and new equipment will cost 250,000 payable immediately. To
operate the new dock will require additional dockside employees costing 70,000
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 85,000 per year. Electricity and other energy used on the dock is
anticipated to cost 40,000 per year. The London head office will allocate
50,000 of its (unchanged) costs to

1 The Tenby-Saundersfoot
Dock company is considering the reopening of one of its mothballed loading
docks. Repairs and new equipment will cost 250,000 payable immediately. To
operate the new dock will require additional dockside employees costing 70,000
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 85,000 per year. Electricity and other energy used on the dock is
anticipated to cost 40,000 per year. The London head office will allocate
50,000 of its (unchanged) costs to this project. Other docks will experience a
reduction in receipts of about 20,000 per year due to some degree of
cannibalisation. Annual fees expected from the new dock are 255,000 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.

a Lay out the net annual cash flow calculations.
Explain your reasoning.

b Assume an infinite life for the project and a cost
of capital of 17 per cent. What is the net present value?

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