capital allowances

FM – L2 – Q64 – DCF: Specific applications

Evaluate whether to acquire a machine and recommend purchase or lease, considering NPV with tax and capital allowances.

Question

NexGen Enterprises is considering whether to acquire a new machine. The machine has a purchase cost of GH₵30,000, an expected useful life of five years, and a disposal value of GH₵6,000 at the end of year 5. The machine would generate additional cash flows of GH₵10,000 in each of its five years.
Two methods of financing are under consideration:
(i) To buy the machine with money obtained from a bank loan, at an interest rate of 8% after tax.
(ii) To lease the machine. The lease payments to the lessor would be GH₵7,000 at the end of each of the next five years.
The company’s cost of capital is 10% after tax.
Corporation tax is 30%. If the machine is purchased, the company will be able to claim capital allowances (tax depreciation allowances) of 25% each year on a reducing balance basis. Tax is payable at the end of the year following the year against profits earned during Year 1.

Required:
(a) Recommend whether the machine should be acquired.
(b) If your recommendation is to acquire the machine, recommend whether it should be purchased or leased.

Answer

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Tags: capital allowances, Cost of Capital, Discounted cash flow, Financing Decisions, investment appraisal, Lease vs Buy, Net Present Value, Taxation
Level: Level 2

Topic: DCF: Specific Applications

FM – L2 – Q58 – Discounted Cash Flow

Calculate NPV for a project by Apex Ltd involving a new machine, considering tax, capital allowances, and working capital.

Question

Apex Ltd is considering whether to invest in the purchase of a new machine costing GH¢250,000. The machine will have a four-year life and a net disposal value of GH¢100,000 at the end of Year 4.
In addition, GH¢38,000 of working capital will be required from the start of the project, increasing to GH¢50,000 at the beginning of the second year. All the working capital will be recovered at the end of Year 4.
The project is expected to generate extra annual revenues of GH¢200,000 and incur annual cash operating costs of GH¢80,000 for each year of the project. Apex Ltd’s cost of capital is 10% after tax.
Corporation tax is charged on profits at 35%. Tax is payable in the year following the year in which the profits occur. There will be a 25% annual writing-down allowance on capital expenditure, for tax purposes. The tax-allowable depreciation is calculated by the reducing balance method.

Required
Calculate the NPV of the project and state whether or not it should be undertaken.

Answer

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Tags: capital allowances, Cash Flows, Discounted cash flow, Financial management, investment appraisal, NPV, Taxation, Working Capital
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q57 – DCF: Taxation and Inflation

Calculate the NPV of a project for CVB Ltd, considering tax, capital allowances, and cash flows over five years with a 15% cost of capital.

Question

CVB Ltd is considering whether to invest in new equipment costing GH¢600,000. The equipment is expected to have an economic life of five years and will have no disposal value at the end of Year 5 (and no disposal costs).
CVB’s after-tax cost of capital is 15%. Tax is charged at an annual rate of 35% and is payable in the year following the year in which the taxable profits arise.
The following forecasts relate to the project under consideration:

Year	GH¢000
	1	2	3	4	5
Sales income	250	250	300	350	400
Direct materials	50	55	58	64	70
Direct labour	25	25	30	30	35
Total direct costs	75	75	88	94	105
Depreciation	120	120	120	120	120

There will be tax allowances on the cost of the equipment, calculated at 25% each year on the reducing balance basis. The first depreciation tax allowance (capital allowance) would be claimed in year 0 (or very early in year 1).
Assume that:
(1) taxable profits are defined as income minus direct costs and capital allowances
(2) cash profits in each year = sales minus direct costs
Required
Calculate the net present value of the project and recommend whether or not the project should be undertaken.

Answer

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Tags: capital allowances, Cash Flows, Cost of Capital, Discounted cash flow, Financial analysis, investment appraisal, NPV, project evaluation, Tax Savings, Taxation
Level: Level 2

Topic: DCF: Taxation and Inflation

FM – L2 – Q56 – Discounted Cash Flow

Calculate NPV for a four-year project with equipment purchase, tax, and capital allowances.

Question

Zest Ltd is considering whether or not to invest in a four-year investment project. The project will require the purchase of equipment costing GH¢800,000. This will have an estimated residual value of GH¢200,000 at the end of Year 4. The equipment will be depreciated by the straight-line method.
The profits before interest and tax from the project are expected to be GH¢400,000 each year. Tax is payable at 30% one year in arrears.
The equipment will qualify for capital allowances (tax depreciation allowances) of 25% each year, using the reducing balance method. The first claim for an allowance would be made against Year 0 profits.
The after-tax cost of capital is 15%.
Required:
Calculate the NPV of the project.

Answer

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Tags: capital allowances, Discounted cash flow, investment appraisal, NPV, Taxation
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q21 – Discounted cash flow

Calculate NPV for a machine investment at Tema Electrical Plc and recommend if it should be undertaken, considering cash flows, WACC, and tax.

Question

Tema Electrical Plc is considering whether to purchase a machine for the manufacture of a new product, Product X. It has been estimated that Product X would have a life of four years and at a selling price of GH¢8 per unit, annual sales demand would be 400,000 units in Year 1, 600,000 units in Year 2 and 800,000 in each of Years 3 and 4.

Variable production and selling costs would be GH¢6 per unit. Incremental annual fixed cost expenditures (all cash cost items) would be GH¢500,000 in Year 1, rising by GH¢20,000 each year.

The machine, which has an annual output capacity of 700,000 units of Product X, would cost GH¢1,200,000 and would have a resale value of GH¢200,000 at the end of Year 4. Capital allowances would be available on a 25% annual reducing balance basis, with a balancing charge or allowance in the year of disposal. Tax at 25% is payable one year in arrears of the profits to which it relates.

Tema Electrical Plc is financed 70% by equity capital and 30% by debt capital. The equity has a cost of 10% and the debt has a cost of 8.9% (before tax).

Required

Calculate the net present value of the proposed project and recommend whether the investment in the machine should be undertaken.

Answer

Find Related Questions by Tags, levels, etc.

Tags: capital allowances, Cash Flows, Cost of Capital, Discounted cash flow, Financial management, investment appraisal, NPV, project evaluation, Taxation, WACC
Level: Level 2

Topic: Discounted cash flow

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FM – L2 – Q64 – DCF: Specific applications

Evaluate whether to acquire a machine and recommend purchase or lease, considering NPV with tax and capital allowances.

FM – L2 – Q58 – Discounted Cash Flow

Calculate NPV for a project by Apex Ltd involving a new machine, considering tax, capital allowances, and working capital.

FM – L2 – Q57 – DCF: Taxation and Inflation

Calculate the NPV of a project for CVB Ltd, considering tax, capital allowances, and cash flows over five years with a 15% cost of capital.

FM – L2 – Q56 – Discounted Cash Flow

Calculate NPV for a four-year project with equipment purchase, tax, and capital allowances.

FM – L2 – Q21 – Discounted cash flow

Calculate NPV for a machine investment at Tema Electrical Plc and recommend if it should be undertaken, considering cash flows, WACC, and tax.

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FM – L2 – Q64 – DCF: Specific applications

Evaluate whether to acquire a machine and recommend purchase or lease, considering NPV with tax and capital allowances.

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FM – L2 – Q58 – Discounted Cash Flow

Calculate NPV for a project by Apex Ltd involving a new machine, considering tax, capital allowances, and working capital.

You're reporting an error for "FM – L2 – Q58 – Discounted Cash Flow"

FM – L2 – Q57 – DCF: Taxation and Inflation

Calculate the NPV of a project for CVB Ltd, considering tax, capital allowances, and cash flows over five years with a 15% cost of capital.

You're reporting an error for "FM – L2 – Q57 – DCF: Taxation and Inflation"

FM – L2 – Q56 – Discounted Cash Flow

Calculate NPV for a four-year project with equipment purchase, tax, and capital allowances.

You're reporting an error for "FM – L2 – Q56 – Discounted Cash Flow"

FM – L2 – Q21 – Discounted cash flow

Calculate NPV for a machine investment at Tema Electrical Plc and recommend if it should be undertaken, considering cash flows, WACC, and tax.

You're reporting an error for "FM – L2 – Q21 – Discounted cash flow"

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