Repeat Problem 10. 8 using a straight-line depreciation method over 7 years. Compare the results with those obtained in Problem 10.8. Which depreciation method would you use?

Data from problem 10.8

 The projected costs for a new plant are given below (all numbers are in \(\$ 10^{6}\) ).

Land cost \(=\$ 7.5\)

Fixed capital investment \(=\$ 120\) ( \(\$ 60\) at end of year \(1, \$ 39.60\) at end of year 2, and \(\$ 20.40\) at end of year 3)

Working capital \(=\$ 35\) (at start-up)

Start-up at end of year 3

Revenue from sales \(=\$ 52\)

Cost of manufacturing (without depreciation) \(=\$ 18\)

Tax rate \(=40 \%\)

Depreciation method \(=\) Current MACRS over 5 years

Length of time over which profitability is to be assessed \(=10\) years after start-up

Internal rate of return \(=9.5 \%\) p.a.