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1 . Katarina Jones lives in Burwood NSW and has decided to expand her home bakery business by building a new factory in Burwood NSW

1. Katarina Jones lives in Burwood NSW and has decided to expand her home bakery business by building a new factory in Burwood NSW. Last month she flew to Perth to visit a former employee who is now a business consultant to get some ideas. She flew up and back on the same day and the total cost including uber and airfares was $1500. The consultant that she visited charged $5,000 for his report and he advised her to use her existing investment property to build a new bakery. The investment property is currently leased to Bakers Delight for $5000 a month. The cost of the fit out of the new premises will be $500,000 and equipment will be $250,000. The accountant insists that depreciation should be charged at straight line over 20 years. The ATO rules however specify that fit outs must be depreciated over 20 years and equipment over 25 years straight line. The new premises will require a $100,000 investment in working capital.
2. Previously they had rented a factory in Greenacre for a cost of $2000 a month. Katarina expects that revenues from the new factor will see revenues increase from $8000 to $25000 per month. Costs will decrease from $10,000 to $8,000 per month.
3. All staff will be retained on their same conditions except that Marty Collins will no longer be needed. He will made redundant, thus saving $100,000 per year. In view of his years of faithful service Katarina will pay him a $500,000 redundancy in year 0 if the project goes ahead. This is tax deductible.
4. The tax rate is 30%.
5. Jones will require a $500,000 Interest Only loan from Westpac at 10% per annum ($50,000 interest per year).
6. The project is expected to last 10 years.
7. All cash flows are given in real terms. The nominal interest rate for projects such as this are 10% and expected inflation is 3.5%.
8. The only equipment owned by Jones at the old premises was purchased 8 years ago for $350,000 and has a useful life of 10 years according to the ATO. It is currently being depreciated for tax purposes over 10 years straight line. If the project goes ahead, she expects to be able to sell the equipment for $120,000.
9. At the end of the project the fit out will be worthless and the equipment $200,000.
Calculate the Free Cash Flows for Period 0. Show all Workings.

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