Question 1 (25 marks)

XNI Ltd. is considering investing in a 2-year project which is expected to generate the following

year-end after-tax cash flows: C1 = $120 million, C2 = $320 million. The yearly discount rate for

the project is 12%. The initial cost of the project is $400 million.

(a) Compute the profit and NPV of the project.

(5 marks)

(b) Based on the answer of part (a), should the project be accepted? Explain.

(3 marks)

(c) XNI's cut-off period is 1.9 years.

Compute the Payback period of the project. Should XNI

accept the project?

(3 marks)

(d) Compute the PI of the project. According to the rule, should XNI accept the project?

(3 marks)

(e) Given the recommendations based on the "decision rules" above, should XNI Ltd.

accept the project? Explain.

(2 marks)

(f) Now suppose that of the $400m initial expenditure, $80m was used for the purchase of a

machine that has an estimated economic life of two years. The machine will be fully depreciated

(i.e., zero book value at the end of the machine's economic life) on a straight-line basis and is

expected to have a resale value of $50m at the end of the project life. The relevant corporate

income tax rate for XNI is 15%.

(i)

Compute the present value of tax savings from the depreciation of the machine.

(3 marks)

(ii)

Compute the present value of the after-tax salvage value of the machine.

(3 marks)

(iii)

How will this affect the NPV and the acceptance/rejection of the project (as compared to

part (a))? Show your calculations.

(3 marks)