Question $2$:

Stainless Steel Industries is considering investing in a specialised band saw that has a cost of R$5,000,000.$ The asset has a useful life of five years and is expected to produce before$-$tax cash flows $($EBITDA$)$ of R$1,500,000$ a Year $1$ of use. This will grow by inflation of $5\%$ a year from Year $2$ to Year $5.$

Stainless Steel Industries will depreciate the asset over four years at $25\%$ a year on a straight$-$line basis for tax purposes and expects to be able to sell the asset at the end of the fifth year for $10\%$ of its original cost price.

In addition, installation costs of R$500,000$ are anticipated and additional upfront net working capital requirements for the line of R$500,000$ are expected.

Assume that the working capital is recouped as a cash inflow in year $5$

Stainless Steel Industries nominal cost of capital is $15\%,$ the interest rate is $8\%,$ the tax rate is $30\%$ and tax is paid in the same year that cash flows are received.

HINTS:

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Calculate NOPAT $=$ EBIT $$ Tax

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Assume that the cashflows are earned at the end of the year.

Required:

a$)$ Advise the directors whether to accept or reject the project.

b$)$ What is the minimum EBITDA in Year $1$ required to make the project viable?