The Petro Oil Company has constructed a village in remote part of Russia. The village will be abandoned when exploration of oil operations cease after 5 years. The following estimates of investment costs, sales and operating expenses to a project to supply the village with meat and agriculture produce over 5-year period by developing nearby land.
(a) Investment in land is $ 1.5 million, farm buildings $250,000 and farm equipment $450,000, which requires maintenance cost of $15,000 in every 2 years. The residual value of the buildings after 5 years is expected to be 0. The land is expected to have a realizable value of $1,500,000 in 5 years’ time. The farm equipment has an estimated life of 5 years and a residual value of $25,000.
(b) Investment in Current Assets is $200,000.
(c) Annual cash sales are estimated to be $3.10 million.
(d) Annual cash operating costs are estimated to be $2.25 million.
Is the project profitable, given the required rate of return is 11% per annum?
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