Transcribed Image Text:B Plc. is a company based in the UK. It is considering a project investment in North America
including the acquisition of new machinery which it hopes will increase its profits.
The initial investment in machinery would be $8 million immediately and the project is
expected to last for three years.
Investment in machinery receives tax allowable depreciation of 25% per annum on a
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straight-line basis. Allowances are receivable one year in arrears. The machinery will be sold
at the end of the project for $5 million, in year 3 prices.
Sales are expected to be $5 million per annum in current terms. Sales prices are expected to
rise by 5% per annum.
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Purchases of raw materials, and labour, are expected to be $1 million each in current terms,
but expected to rise by 2% and 3% respectively.
Corporation tax in the UK is 30% and in North America is 30%. Corporation tax is payable in
the following year in both countries.
The project will require an injection of working capital immediately of $5 million and will be
released at the end of the project. The working capital requirement is expected to rise by
2% per annum.
The nominal cost of capital of B Plc. is 10%. General inflation in the UK is predicted to be 4%
per annum, and in North America is 3%, throughout the duration of the project.
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The current spot rate for the £ to the $ is £1 = $1.5000.
Definition Video Definition Accounting method wherein the cost of a tangible asset is spread over the asset's useful life. Depreciation usually denotes how much of the asset's value has been used up and is usually considered an operating expense. Depreciation occurs through normal wear and tear, obsolescence, accidents, etc. Video
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