Question 4 (19 marks)

You are considering a project that will require the investment of $5 million in equipment which will be depreciated on a straight-line basis to zero over four years. At the end of year 4, the equipment is expected to realise a scrap value of $950,000. Revenue is expected to be $ 3 million per year and expenses will be $1.2 million per year. Expenses include $ 100,000 in interest costs. All costs are deductable for tax purposes. Your company also requires $800,000 in working capital. If the company tax rate is 30%, should you accept the project? Rate of return 10%