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Ex-A A company is considering a project to enter a new line of business. The new business will require the company to purchase a new
Ex-A A company is considering a project to enter a new line of business. The new business will require the company to purchase a new machine that will cost $930,000. The cost of the machine will be depreciated on a straight-line basis to zero over three years. Working capital of $50,000 will be required from the outset, which will be fully recovered at the end of year 3. The project is expected to generate $1.6 million in sales each year. The operating costs, excluding depreciation, are expected to be $1.15 million per year. The company tax rate is 30%, and the project's required rate of return is 12%. What is the net present value of the project? Would the project be accepted? Ex-B You are employed as a consultant to a hospital that is considering expenditure on some expensive medical equipment, which costs $100,000. The hospital estimates that the incremental cash flows associated with purchasing the equipment, before any taxes and depreciation, will be as follows: Year Cash flow 1 25,000 2 25,000 3 25,000 4 40,000 5 50,000 The applicable tax rate is 30%. The equipment can be depreciated for tax purposes at 25% of original cost over four years. The hospital requires an after-tax rate of return of 10% p.a. Calculate the after-tax cash flows and determine whether the equipment should be purchased
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