Present an itemised breakdown (and the total) for each of the following: Q1. The Cash Flows at the start. Q2. The Cash Flows over the life Q3. The Cash Flows at the end. Q4. The NPV of the capital budgeting decision and a short explanation of your recommendation.

2. Today in 2022, the cost of the new kiln is $27 million. According to industry reports, a new kiln can operate for 30 years, however, UMG will operate the new kiln for only ten years. In 2021, UMG paid a consultant $10,000 to provide a valuation service. Today you received the consultants report which indicates that the existing kiln can be sold today for $8 million, and the market value of the new kiln that UMG is considering purchasing declines by $1.50 million after every year that it is used. The existing kiln was purchased 12 years ago for $22 million and is being depreciated over its 20-year tax life at the time of purchase. If UMG do not proceed with purchasing the new kiln, the existing kiln will continue to operate for a further ten years from today, and in ten years time the existing kiln would be worthless.

3. To partially fund the purchase of the new kiln, UMG will obtain a loan of $15 million. The interest rate charged on the loan is 10% p.a., and the loan term is ten years. The first principal and interest payment occurs in Year 1.

4. Three years ago, a competitor purchased a new kiln using a required rate of 10%. The manager of the UMG Accounting team suggests using a required of return of 10% to value UMGs new kiln. The UMG Finance team indicate that the required return that UMG applies to projects with a similar risk profile as the new kiln is 12%

to projects with a similar risk profile as the new kiln is 12%.

5. The existing kiln generates annual cash sales of $50 million, this sales figure is expected to remain constant for each of the next ten years. The Welshpool facility is strategically located in close proximity to Western Australias high quality barley growing region and is also well situated to meet increasing demand both domestically and via exports to Asia. During the first five years of operation, it is expected that the new kiln will generate annual cash sales equivalent to 150% of the yearly cash sales when compared to the existing kiln. Following on, the new kiln is expected to generate cash sales which are twice the annual cash sales when compared to the existing kiln.

6. The total annual operating costs (including gas and electricity costs) for operating the Welshpool facility with the existing kiln is $43 million per annum. For the existing kiln, annual gas and electricity costs account for 10% of the total annual operating costs to operate the Welshpool facility. The new kiln is expected to increase the total yearly operating costs of the Welshpool facility to $57 million (excluding gas and electricity costs). The gas and electricity costs for the new kiln will equate to 110% of the annual gas and electricity costs of the existing kiln.

7. The maintenance costs of the existing kiln is $1.2 million per year. The new kiln is more efficient and built with sturdier materials, as a result, the yearly maintenance costs associated with the new kiln are $0.8 million.

8. Next year UMG is anticipating increasing its annual dividend by $0.01 every year going forward. Currently UMG pay dividends of $0.01 per share, and UMG have 300,000,000 shares on issue.

9. The existing kiln generates yearly marketing costs of $70,000. If UMG proceed with the new kiln, it generates annual marketing costs of $90,000.

10. The Accounting team notify you that last year UMGs annual combined total depreciation expenses across all of its non-current assets located across the globe totalled $61 million. According to Delta Goodrem (a representative from the Australian Tax Office), the effective life of the new kiln is 25 years. Delta also confirms that operating expenses incurred by UMG in generating revenue are tax deductible in the year the expense is incurred.

11. The total combined annual insurance costs for UMG globally is $11.90 million. The insurance expenses associated with the existing kiln cost $800,000 per annum. As the new kiln uses the latest technology it is expected to have annual insurance costs of $1,000,000 (hint: assume insurance costs occur at the end of the year).

12. Currently, the total salary expenses combined across all UMG operations in Australia, Europe and North America is $100 million p.a., where 8% of these expenses account for the annual salary paid to staff operating the existing kiln in the Welshpool facility. The new technology in the new kiln means that less staff are required to operate the new kiln relative to the existing kiln. As a result, the total yearly salary expenses associated with the new kiln amount to 85% of the yearly salary expenses of the existing kiln.

13. UMGs Australian headquarters are located on Level 18 of the Citigroup Centre in Sydney. The purchase of the new kiln is not expected to affect expenses associated with the Australian headquarters, which are today equal to $3 million. Regardless of whether UMG buy the new kiln to replace the existing kilm, starting in 2025, it is expected that annual costs for UMGs Australian headquarters are expected to increase by 2% per annum.

14. As the new kiln has the capacity to produce more malt when compared to the existing kiln, this will result in the following changes to occur immediately: Inventory will need to increase immediately to a total of $36 million compared to the current figure of $24 million used by the old kiln; Accounts receivable will remain at the current $14 million figure; and Accounts payable will increase to $15 million from the current figure of $12 million.

15. Due to safety concerns with operating the existing kiln, staff underwent safety training costing $50,000 per annum (hint: assume this cost is incurred at the end of the year). Due to an improved design which reduces manual tasks required to process malt, the new kiln is safer to use than the existing kiln, as a result the annual safety training is not required to operate the new kiln. However, the new kiln requires 30 staff members to immediately undertake a one-off training to operate the new kiln, the operating training costs $2,000 per staff member.

16. It is expected that the incremental COVID hygiene and social distancing costs to operate the new kiln will cost UMG $50,000 in Year 1.

17. The company tax rate is 30%.