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Machine cost = $500,000 Project life = 2 years Tax allowance for machine = 20% (reducing...

Machine cost = $500,000

Project life = 2 years

Tax allowance for machine = 20% (reducing balance method)

Tax rate = 15% (payable half in the current year)

Cost of capital before tax = 10%

General rate of inflation = 4%

The incremental cash inflows from project = $2 million p.a (in today’s value)

The resale value of the machine is calculated at the end of the project to be the same as the net book value of the asset at the time of sale.

Compute the NPV.

Solutions

Expert Solution

We can interpret tax rate = 15% (Payable half for the cirrent year) in two ways :-

  • First Year rate is 7.5%
  • Project started inbetween of the year so we have to pay for half year tax only.

This question is done on the first assumpation that first year tax rate is 7.5%.

jeff jeffy answered 2 months ago
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