Question

1) ABC Ltd is considering a project which will require the purchase of a machine for RO1,000,000 at time zero, this machine will have a scrap value at the end of its four - year life: this will be equal to its written - down value. (25% declining balance writing - down allowance on the machine each year). Corporation tax, at a rate of 30% of taxable income, is payable. ABC Ltd's required rate of return is 12%. Operating cash flows, excluding depreciation, and before taxation, are forecast to be: Time (year) 1 2 3 4 Cash flows before tax 300,000 500,000 400,000 200,000 Note: All cash flows occur at year ends.

2) XYZ Company is considering the purchase of a new machinery which will result in a capital outlay of RO25,000. The machinery is useful for five years. The expected salvage value at the end of its useful life is RO4,000. It is expected that the machinery will fetch an additional income (Cash flow before tax) of RO5,000 (Year 1), RO7,500 (Year 2), RO10,000 (Year 3). RO5,000 (Year 4) and RO5,000 (Year 5) during the five years. The tax rate is 109. Assume that the company is expecting a minimum rate of return of 12%, Will you recommend the purchase of machinery? (Use NPV Method)
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Answer 1

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