Crabb Ltd is considering whether to purchase a new machine. It will cost $440,000 to purchase and $40,000 to install. It is expected to generate additional annual revenues of $90,000 per year for eight years, at which time it will have no further use or value. It will also cost an additional $2,000 in electricity per year.

Crabb Ltd uses straight line depreciation over the 8 year period. However, the ATO (Australian Tax Office) allows an accelerated rate of depreciation and assigns a 5 year useful life to the machine.

The corporate tax rate is 30%.

The company applies a 7% rate of return to similar projects (the present value factor of an annuity of eight years @ 7% is 5.97).

Required:

(a) What is the payback period for this project? (Ignore taxes and depreciation for part (a)) (3 marks)

(b) What is the cash flow in year zero? (2 marks)

(c) Calculate the tax shield (the incremental cash saving based on depreciation ONLY) for years 1 - 5. (3 marks)

(d) Calculate the NPV of this investment (10 marks)

(e) Should the company accept this project? Why or why not? (2 marks)