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QUESTION 3 Baze University is evaluating two investment projects, as follows. Project 1 This is an investment in new machinery to produce a recently-developed product.

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QUESTION 3 Baze University is evaluating two investment projects, as follows. Project 1 This is an investment in new machinery to produce a recently-developed product. The cost of the machinery, which is payable immediately, is $1.5 million, and the scrap value of the machinery at the end of four years is expected to be $100,000. Tax-allowable depreciation can be claimed on this investment on a 25% reducing balance basis. Information on future returns from the investment has been forecast to be as follows: Year 1 2 3 4 140,00 Sales Volume (unit/Year) 50,000 95,000 0 75,000 Selling Price (S/unit) 25 24 23 23 Variable Cost (S/unit) 10 11 12 12.5 105,00 115.00 125,00 125.00 Fixed cost (year) 0 0 0 0 This information must be adjusted to allow for selling price inflation of 4% per year and variable cost inflation of 2.5% per year. Fixed costs, which are wholly attributable to the project, have already been adjusted for inflation. Baze pays profit tax of 30% per year one year in arrears. QUESTION 3 Baze University is evaluating two investment projects, as follows. Project 1 This is an investment in new machinery to produce a recently-developed product. The cost of the machinery, which is payable immediately, is $1.5 million, and the scrap value of the machinery at the end of four years is expected to be $100,000. Tax-allowable depreciation can be claimed on this investment on a 25% reducing balance basis. Information on future returns from the investment has been forecast to be as follows: Year 1 2 3 4 140,00 Sales Volume (unit/Year) 50,000 95,000 0 75,000 Selling Price (S/unit) 25 24 23 23 Variable Cost (S/unit) 10 11 12 12.5 105,00 115.00 125,00 125.00 Fixed cost (year) 0 0 0 0 This information must be adjusted to allow for selling price inflation of 4% per year and variable cost inflation of 2.5% per year. Fixed costs, which are wholly attributable to the project, have already been adjusted for inflation. Baze pays profit tax of 30% per year one year in arrears

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