An electronics company is assessing whether to establish a new manufacturing facility in Australia.
QUESTION 1 25 MARKS An electronics company is assessing whether to establish a new manufacturing facility in Australia. The current market price of the new high speed processor is $4 each. A feasibility study into building a facility capable of producing 8 million processors per year has shown that development costs include $20m to build a production facility (building, plant and equipment) and $500k for land. The facility will have a useful life of 10 years. The Australian Government is offering the manufacturer an accelerated depreciation of 5 years (straight-line) for the new facility. At the end of the project's life, all production equipment in the building will be removed and refurnished as a warehouse at a cost of $1.6m, at which point the building and land is expected to be sold for $6m a year later (Ignore Capital Gains Tax). Direct production costs in making the new processor chip (i.e. labour, materials and electricity) are estimated at $3 per processor chip and fixed operating expenses to be $3.5m per annum. The corporate tax rate is 30% and the MARR is 15%. a) Calculate the annual net operating cash flow applicable over the life of the project. [9 MARKS] b) [4 MARKS] [6 MARKS] d) Draw the after tax cash flow diagram. Carry out a net present value assessment of the project and determine if you would recommend the investment. Using the NPV value calculated part (c) determine the equivalent uniform "Annual Worth" over the 11 year time frame. What is the advantage of the declining balance method of depreciation verses the straight-line method. [4 MARKS] e) [2 MARKS] QUESTION 1 25 MARKS An electronics company is assessing whether to establish a new manufacturing facility in Australia. The current market price of the new high speed processor is $4 each. A feasibility study into building a facility capable of producing 8 million processors per year has shown that development costs include $20m to build a production facility (building, plant and equipment) and $500k for land. The facility will have a useful life of 10 years. The Australian Government is offering the manufacturer an accelerated depreciation of 5 years (straight-line) for the new facility. At the end of the project's life, all production equipment in the building will be removed and refurnished as a warehouse at a cost of $1.6m, at which point the building and land is expected to be sold for $6m a year later (Ignore Capital Gains Tax). Direct production costs in making the new processor chip (i.e. labour, materials and electricity) are estimated at $3 per processor chip and fixed operating expenses to be $3.5m per annum. The corporate tax rate is 30% and the MARR is 15%. a) Calculate the annual net operating cash flow applicable over the life of the project. [9 MARKS] b) [4 MARKS] [6 MARKS] d) Draw the after tax cash flow diagram. Carry out a net present value assessment of the project and determine if you would recommend the investment. Using the NPV value calculated part (c) determine the equivalent uniform "Annual Worth" over the 11 year time frame. What is the advantage of the declining balance method of depreciation verses the straight-line method. [4 MARKS] e) [2 MARKS]
