Reference no: EM132556482

Question - Fortress Partners provides security services to corporate clients. The firm is currently evaluating a proposal to open a new branch office in Parramatta, and an appropriate building in the CBD has been identified. Purchasing the building will cost $4.5 million dollars and fitting it out will cost an additional $500,000. The fitment costs will be tax deductible at the time of payment. Fortress will also install a state-of-the-art digital command centre in the new building, at a cost of $1.5 million. Finally, it will have to purchase 5 new patrol vehicles, at a cost of $60,000 each. Both the command centre and the vehicles would be depreciated straight-line over 5 years, while the building would not be a depreciating asset.

If Fortress goes ahead with the project, its annual revenues are expected to increase by $2.5 million. However, the firm's operating costs will increase by $50,000 per year and it will pay additional taxes and levies of $20,000 per year. Fortress will also have to hire staff to run the new branch office, at a cost of $800,000 per year.

What is the total cash flow at the start of the project?

The firm is evaluating the proposal as a 5-year project. At the end of the period, it is expected that the building could be sold for $6 million, while the vehicles will be worth $20,000 each and the command centre will have no commercial value. Selling the building at that time will have no tax implications.

What are the total annual cash flows over the life of the project?

$1,249,000

$1,231,000

None of the other answers is correct

$1,141,000

$1,159,000