Page 321 - AFM Integrated Workbook STUDENT S18-J19
P. 321
Chapter 15
Answers
Chapter 2
Question 1
The directors of Rusby Co are appraising a new, four-year investment project,
which will require the immediate purchase of a machine for $2 million.
Annual net operating cash inflows are expected to be $1 million in current
terms and inflation is expected to be 6% per year. At the beginning of each
year, Rusby Co will need to provide working capital of 25% of the anticipated
net operating cash inflow for the year. Any remaining working capital will be
released at the end of the project.
At the end of the project, the machine will be sold for $1 million.
The corporation tax rate is 20%. Tax allowable depreciation is available on the
machine at a rate of 25% per year on a reducing balance basis. A balancing
adjustment is made in the year the machine is sold.
The company’s nominal cost of capital is 12%.
Required:
Calculate the NPV of the project.
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