Smith Brothers has purchased a machine that will see output increase from $1$ million units to

$1\mathrm{.}5$ million units. The variable cost per unit will be $$5\mathrm{.}00$ and the sales price per unit $$7\mathrm{.}50.$

Fixed costs will decrease from $$400,000$ per annum to $$350,000$ per annum. Head office costs

of $$150,000$ will be allocated to the new machine but the overall head office costs have not

changed with the addition of the new machine. Depreciation on the machine will be $$100,000$

per annum. The old Machine that was replaced and still had a useful life of $3$ years had annual

depreciation of $$25,000.$ The tax rate is $20\%.(9$ Marks$)$

a$)$ Calculate the FCF in Year $2$ b$)$ The Capital Investment Institute has just purchased an asset they intend to use in their

business. The machine has a cost of $$40$m and they intend to depreciate this for $6$ years

straight line. The taxation office has determined that this be depreciated over $8$ years

straight line.

The project they are undertaking will last $6$ years and the asset will be sold at that time for

$$2$m$.$

Calculate the after$-$tax salvage CF in Year $6?$ Assume a $25\%$ tax rate. $($b$)$ The Capital Investment Institute has just purchased an asset they intend to use in their

business. The machine has a cost of $$40$m and they intend to depreciate this for $6$ years

straight line. The taxation office has determined that this be depreciated over $8$ years

straight line.

The project they are undertaking will last $6$ years and the asset will be sold at that time for

$$2$m$.$

Calculate the after$-$tax salvage CF in Year $6?$ Assume a $25\%$ tax rate.