Q. A project requires an initial investment in machinery of $400,000. Additional cash inflows of $150,000 at current price levels are expected for three years, at the end of which time the machinery will be scrapped. The machinery will attract tax-allowable depreciation of 30% on the RB basis, which can be claimed against taxable profits of the current year, which is soon to end. A balancing charge or allowance will arise on disposal. The tax rate is 40% and tax is payable 50% in the current year, 50% one year in arrears. The pre-tax cost of capital is 22% and the rate of inflation is 10%. Assume that the project is 100% debt financed. Required Assess whether the project should be undertaken.
Q.
A project requires an initial investment in machinery of $400,000. Additional
current price levels are expected for three years, at the end of which time the machinery will be scrapped. The machinery will attract tax-allowable
Required
Assess whether the project should be undertaken.
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