Analysis of New Barges Project - Incremental Cash Flows Method & Sensitivity Analysis

 These new barges will cost MYR4,000,000.00 each. Their accountant has advised that these can be depreciated straight line at 5% per annum while their tax advisor has advised that they are can be depreciated for 10 years on a straight line basis. They can be sold at the end of their useful lives for 15% of their purchase price. Given Didie's outstanding marks while at University she is able to advise the business to use the accounting depreciation rate for capital budgeting purposes.
The benefit of the new barges is that they will have the necessary technology to be able to carry and pump both light and heavy diesel. The one downside is that they will no longer be able to sell petrol. As they are no longer distributing petrol, their insurance company has advised that their insurance premiums will fall by MYR2,000.00 per year from the first year of operation.
A feasibility study has been completed by Woodward and Associates to assess the likely demand for fuel for the next ten years. They expect that there will be a demand for 5 million litres of light diesel and 10 million litres of heavy diesel in the first year. The margin on the sale of fuel has traditionally been MYR2.00 per litre delivered.
Previously they were supplying 2 million litres of petrol and 4 million litres of light diesel per annum. The cost of this report was MYR25,000. With the move to heavy diesel it is estimated that they will hold MYR1,000,000.00 worth of heavy diesel inventory and MYR500,000.00 worth of light diesel. This is an increase from the previous figure of MYR350,000.00 of light diesel inventory held. They will no longer need to hold the MYR50,000.00 worth of petrol. This can be sold for this value if they go ahead with the project.
The current tax rate is 30%.
If the project goes ahead they will not need as many staff as they previously did. The jobs of two captains and two maintenance workers will no longer be required. This will save the company a total of MYR200,000 per year. In light of the fact that these workers are being retrenched they will receive a redundancy payment at the very start of the project of 50% of their annual wage.
Presently David's wage is MYR150,000.00 and Lily's is MYR50,000.00. If the new project goes ahead the company will pay David MYR100,000.00 per annum and Lily also MYR100,000.00 per annum. To facilitate the purchase of the eight new barges the company will borrow MYR32,000,000.00 from Maybank at a rate of 7.5% per annum on an interest only basis.
The current rate of inflation is 5.0% p.a. and they pay tax at 30 cents in the ringgit and the company's required nominal rate of return is 12.5% p.a. on a project such as this one. Thus, the required real rate of return is 7.143%
Detailed instruction: This assignment consists of 2 parts (please refer marking rubrics)
(1) Calculate the NPV using incremental cash flows approach. Clearly indicate the decision and reason to accept or reject project. (2) Conduct sensitivity analysis for the following: demand of diesel. margin on sales of fuel, and salvage value
*Please do not include salvage value when calculating depreciation