Misun company is considering installing a solar power system. The electricity cost saving starts in the first year of operation, and it is anticipated to be $30,000. After that, the cost saving is expected to decrease by 5% annually. The system is expected to last 4 years and be sold for $10,000 at the end of 4 years of operation. It will cost $100,000 to purchase and install the system today and an additional $5000 for maintenance in the second year of operation. 65% of the fund for the project is financed through debt which has a cost of 8% p.a. The shareholders require an additional 2% p.a. on what creditors earn.
a) Draw the timeline and set out the cash inflow, cash outflow and net cash flow for each year.
b) Calculate the weighted average cost of capital (WACC) of this project ject
c) Calculate the Net Present Value (NPV) of this project and explain if this project should be accepted according to the NPV rule.
