AaBbCcDdEe CorpFin Ans... CorpFin_Body CorpFin_Bod... QUESTION FOUR Oz Runway Ltd. is an airport runway construction company operating in Melbourne Airport. The management of this company is considering a proposal to acquire a new drilling equipment to develop Terminal -7 in Melbourne Airport. The new equipment has double the capacity as the old equipment and it will provide operating efficiencies in labour and power usage, the machine has been designed to reduce noise when it is operating and high-tech mode to minimise the carbon emission. The savings in operating costs are estimated to be $1025,000 annually for five years. The new drilling equipment would cost $2,850,000 and would be purchased at the beginning of the year. The equipment dealer is certain that the equipment would be operational during the second quarter of the year in which it is installed. Therefore, only 75 per cent of the estimated yearly savings can be obtained in the first year. However, equipment depreciation will not be affected by the year 1 operating result. the construction is undertaken by Oz Runway Ltd., a 10 per cent investment allowance can be taken from the Australian Government. The company would incur a one-off expense of $220,000 to transfer drilling activities from the old equipment to the new equipment. However, no loss of cost saving will occur because the facility where the drilling occurs is large enough to install the new equipment without interfering with drilling operations. The taxation depreciation on the new equipment would be 20 per cent using the straight-line method. The old equipment has been fully depreciated. However, Oz Runway Ltd.'s management has reviewed its condition and concluded that if the new equipment was not purchased, then the old equipment could continue to be used for additional three years. Since the company decided to purchase the new equipment, it would receive $175,000 net of removal costs for disposing the old equipment. The new equipment would have a salvage value of $ 150,000 at the end of its life. The company is subject to a 30 per cent income tax rate and requires an after-tax return of at least 12 per cent on any investment. REQUIRED: 1. What type of investment is Oz Runway Ltd. considering? Provide details as to why you came to this conclusion. 2. Advise the management of Oz Runway Ltd. on whether they should proceed with the project. Give reasons and consider qualitative factors. ABC