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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
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 $ The consultant that she visited charged $ 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 $ a month. The cost of the fit out of the new premises will be $ and equipment will be $ The accountant insists that depreciation should be charged at straight line over years. The ATO rules however specify that fit outs must be depreciated over years and equipment over years straight line. The new premises will require a $ investment in working capital.
Previously they had rented a factory in Greenacre for a cost of $ a month. Katarina expects that revenues from the new factor will see revenues increase from $ to $ per month. Costs will decrease from $ to $ per month.
All staff will be retained on their same conditions except that Marty Collins will no longer be needed. He will made redundant, thus saving $ per year. In view of his years of faithful service Katarina will pay him a $ redundancy in year if the project goes ahead. This is tax deductible.
The tax rate is
Jones will require a $ Interest Only loan from Westpac at per annum $ interest per year
The project is expected to last years.
All cash flows are given in real terms. The nominal interest rate for projects such as this are and expected inflation is
The only equipment owned by Jones at the old premises was purchased years ago for $ and has a useful life of years according to the ATO. It is currently being depreciated for tax purposes over years straight line. If the project goes ahead, she expects to be able to sell the equipment for $
At the end of the project the fit out will be worthless and the equipment $
Calculate the Free Cash Flows for Period Show all Workings.
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