Capital Appraisal

* Introduction

The project is an investment in a new winery in the southern highlands of NSW. It will require Eastern View Wineries Pty Ltd to purchase land, construct vineyards and buildings and obtain plant and equipment for winemaking operations. The initial investments required are $10 million.

The company has indicated that the business would be sold after 10 years. The residual values of these investments are $8.75 million.

The project includes Eastern View Wineries estimated that annual cash sales are $0 for the first 2 years and $3 million for every year after that; annual costs are $1.2 million for the first 2 years and $1.8 million for every year after that; annual administrative overhead costs are $45,000. In order to operate the business, the company will borrow $5 million from bank at interest rate 8% per annum with all of principal to be paid in full at maturity.

Under this project, Government allows the cost of establishing vineyards; buildings; plant and equipment are to be depreciated on a straight – line basis. Government tax is 30% of gains. WACC is 10%.

At this assessment we will prepare an analysis of the project to show its annual cash flows, taxable income and capital expenditures; calculate the payback period; using discounted cash-flow appraisal techniques and other project evaluation approaches to make reasonable recommendations on acceptance or rejections of the projects after considered the impact of other factors. The role and importance of a post-investment audit is discussed in the assessment as well.