A company has to decide now whether to invest in a new piece of machinery or not. The machine in question costs 640,000 to buy and is expected to have a working life of three years. Its scrap value three years from now is 50,000. Capital allowances for the machine are calculated on a straight-line basis over four years with the first allowance taken in year 0. The corporate tax rate is 20%. Ignore inflation. The company pays sufficient tax on all of its operations to absorb all capital allowances. (a) Calculate the schedule of capital allowances that the company will enjoy if it buys the machine now. Pay particular attention to the timing of those capital allowances and to the size of the final capital allowance. Hence calculate the incremental cash flows for the company arising from the capital allowances associated with the machine. If the (after-tax) opportunity cost of capital is 10% per year, calculate the present value of the incremental cash-flows arising from the capital allowances associated with the machine. (9 marks) Now suppose the tax authorities change the method of calculating capital allowances to straight-line over five years. The first allowance is still to be taken in year 0 and the corporate tax rate is still 20%. (b) Explain whether the capital allowance in each year will be higher or lower under the new method. [You do not need to calculate the exact values of each capital allowance.] Hence deduce whether the present value of incremental cash flows arising from the capital allowances associated with the machine will increase or decrease when the new method is used. Explain. [Hint: Consider the differences between the magnitudes and timing of the cash flows arising from the two different calculation methods. You do not need to do any further calculations.] (6 marks)