Demo Qs Topic 4 - Demonstration Lecture Topic 4 Capital...

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Demonstration Lecture Topic 4 Capital Budgeting Question 1 The Salte Corporation is an Australian-based company with a large proportion of foreign shareholders. Its core business is the production of machinery used in the heavy-industry sector. It has recently completed a $400,000 two year marketing study on whether to introduce a new machine to the market. Based on the results of the study, Salte has estimated that 10,000 of its new machines can be sold annually over the next six years at a price of $9,615 each. Variable costs per machine are $7,400 and fixed costs total $12 million a year. Working capital specifically for this project is estimated to be $2 million and will be returned at the end of the project’s life. The cost of the machine includes $40 million to build production facilities and $2.4 million in land. The $40 million investment will be depreciated to zero over the life of the project. At the end of the project the facilities, including the land, will be sold for an estimated $8.4 million. The market value of the land, which is not tax-deductable, is not expected to change. Finally, start-up costs also entail fully tax-deductable expenses of $1.4 million, which are deductable at the end of the first year of production. The tax rate applicable to Salte is 30%. The after-tax discount rate is 10%. Calculate the NPV of the project and advise Salte whether it should proceed with the project. 1
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Question 1 (cont.) Step 1: Depreciation: $40 million/6 years = $6,666,667 p.a. Step 2:
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Demo Qs Topic 4 - Demonstration Lecture Topic 4 Capital...

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