Question 1

A company has the opportunity to expand its business operations by acquiring new plant and equipment. The plant and equipment will cost $90,000 and have a useful life of 6 years. At the end of the period the plant and equipment will have a salvage value of $11,000. The Tax Office allows the company to depreciate this equipment at 30% per annum using the prime cost method (straight line). The tax rate is 30%, and is paid in the year of income. An additional working capital investment of $22,000 is also required and will be recouped in the final year of the project. Additional gross operating revenues from the investment are expected to be: Year 1 = $22,000; Year 2 = $42,000; Year 3 = $48,000; Year 4 = $40,000; Year 5 = $29,000; and Year 6 = $15,000. The company requires a rate of return on their investments of 14%. Required: What is the Net Present Value of this investment opportunity?

Question 2 Gormley Products Pty Ltd is considering the introduction of a new product to add to its existing product line. The company expects a reasonable level of sales for the next 5 years after this period the product sales are expected to be zero. Specialised equipment will need to be purchased to produce the new product at a cost of $120,000. Additional working capital of $19,200 will need to be introduced over the life of the product. Working capital will be recovered at the end of the product's life. Salvage value of the equipment at the end of Year 5 is $12,000. Year and Pre Tax Net CASH Flows 1: $22,000 2: $26,000 3: $41,000 4: $65,000 5: $89,000 Additional information: The tax office allows depreciation of the prime cost at a rate of 40% (Straight Line). The tax rate is 30%. The company uses an after-tax cost of capital of 12.5%. Required: After determining the Annual Net After-Tax Cash Flows, calculate the INTERNAL RATE OF RETURN (IRR) for this project.

Question 3: TEST TEST The McGraw Company is considering a proposal to purchase new plant and equipment to be used in the manufacture of a new product line. The expected cash flow details are as follows: Cost of equipment $450,000 Life of project 5 years Salvage Value $20,000 to be received at the end of year 5. Depreciation 20% per annum, straight line depreciation Tax Rate 30% Expected Cash Inflows before depreciation and taxation are as follows: Pre Tax Cash Inflows Year 1: $135,000 Year 2: $145,000 Year 3: $155,000 Year 4: $160,000 Year 5: $140,000 Salvage Value (before tax): 20,000 Tax is paid in the year incurred. Required: Calculate the Internal Rate of Return.