Due to the project, inventory will grow by $$1\mathrm{.}5$m initially $($at t$=0),$ and then by $$0\mathrm{.}8$m at the end of the first year $($t$=1).$ Accounts payable will increase by $$0\mathrm{.}6$m at the end of the first year $($t$=1).$ At the end of the project, the net operating working capital accumulated due to the project will be recovered.

Consulting fees of $$4,000$ were paid six months ago. This relates directly to the project.

The factory building was purchased $40$ years ago for $$10$m and is currently being rented to another company for $$0\mathrm{.}2$m per year. The factory building is fully depreciated for tax purposes. The tenant will need to vacate the factory if this project is undertaken.

The equipment will have a book value of $$2$m at the end of the project for tax purposes. However, the equipment is expected to fetch $$2\mathrm{.}6$ million when it is sold at t$=2.$

Assumption

All cash flows occur at the start or end of the year as appropriate, not in the middle or throughout the year.

Which of the following statements is NOT correct?

Question $1$Answer

a$.$

Change in Net Operating Working Capital at time $2$ is $-$$$1\mathrm{.}7$m

b$.$

The opportunity cost of using the building for this project is $$10$m

c$.$

Tax on the disposal of equipment at time $2$ is $$180,000$

d$.$

Time zero free cash flow is $-$$$9\mathrm{.}5$m