Oostmeyer NV is an import-export company based in Amsterdam. It is considering investing in a new logistics scheduling system that will require a capital expenditure outlay of 500.000 Because of the rapid pace of technological change, the logistics system is expected to only have a 4-year life and, at the end of that time,the system used will be sold off for 20 000.

In addition to the capital expenditure, 40 000 of working capital" will be required from the start of the project - this consists of an inventory of spare components and other supplies, and this will have to be increased to 50 000 at the end of the second year. All the working capital investment will be recovered at the end of the project's life.

The project is expected to increase the company's annual revenues by 400 000 and to incur annual cash operating costs of 160 000. The company believes that an after-tax discount rate of 10% would be appropriate. The logistics system would be financed with a 4-year bank loan of 500 000 at 6% interest.The working capital would be financed out of Oostmeyer's own retained profits. Corporation tax rate is 20% in the Netherlands and is paid at the end of each year. Capital expenditure, less scrap value, attracts tax relief and is spread evenly over an investment's expected life. There is no tax relief on working capital investment.

Tax relief on capital expenditure

Capital cost 500 000

Disposal Value - 20 000

Net Investment cost 480 000 / 4 years = 120 000

Tax relief 120 000 x 0.20 = 24 000 per year

Tax charge on project's profits (000s)

Annual Revenues 400

Less annual costs 160

Taxable Profit 240

Tax at 20% 48