Question 1:

NZ Gifts Limited is considering a proposal to launch a new souvenir for the tourist market. This proposal will require the purchases of new equipment to replace existing equipment. The cost of the new equipment is $395,000. Installation costs associated with this equipment amounts to $5,000. The asset will be depreciated using the diminishing value (also known as reducing balance) depreciation method at the Inland Revenue Department (IRD) approved rate of 45% per annum. After four years, the equipment is expected to have a re-sale (scrap) value of $36,602.

Information for the old equipment follows:

• Carrying amount (book value) $80,000

• Market value (fair value) $75,000

The old equipment will have no scrap value at the end of its remaining useful life of two years (depreciated using the straight-line method).

Revenue and operating costs for both the old equipment and the new equipment follow:

	Year 1($)	Year 2 ($)	Year 3($)	Year 4($)
Old equipment
Revenue	90,000	80,000
Costs	60,000	50,000
New Equipment
Revenue	1,520,000	2,000,000	1,240,000	480,000
Costs	1,100,000	1,400,000	925,000	340,000

The companys tax rate is 28%.

From the above information:

a. Calculate the net cash investment for the project.

b. Calculate the projects incremental net cash flows for each year.