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An integrated chip manufacturer is assessing whether to establish a new manufacturing facility in Australia. The current market price of a fast new memory chip is $4ea. A feasibility study into building a facility capable of producing 8m chips per year has shown that development costs include $20m to build a production facility (building, plant and equipment) and $1.5m 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 projects 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 memory chip (i.e. labour, materials and electricity) are estimated at $3 per memory chip and fixed operating expenses to be $3.5m per annum. The corporate tax rate is 30% and the MARR is 15%.

QUESTION 3 25 MARKS An integrated chip manufacturer is assessing whether to establish a new manufacturing facility in Australia. The current market price of a fast new memory chip is $4ea. A feasibility study into building a facility capable of producing 8m chips per year has shown that development costs include $20m to build a production facility (building, plant and equipment) and $1.5m 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 memory chip (i.e. labour, materials and electricity) are estimated at $3 per memory chip and fixed operating expenses to be $3.5m per annum. The corporate tax rate is 30% and the MARR is 15%. a) b) Calculate the annual net operating cash flow applicable over the life of the project. [14 MARKS] Draw the after tax cash flow diagram. [5 MARKS] Carry out a net present value assessment of the project and determine if you would recommend the investment. [6 MARKS] c)