Question 1
The after-tax cost of capital is 8%. A project costing RM60,000 will be expected to earn cash profits of RM40,000 in year 1 and RM50,000 in year 2. Taxation at 25% occurs one year in arrears of the profits or losses to which they relate.
For the purpose of this exercise, assume that the cost of the project is not an allowable cost for tax purposes (i.e. capital allowances should be ignored).
Calculate the NPV of the project.
Question 2
An asset costs RM80,000 and has an expected economic life of four years with no residual value. Depreciation is calculated using the straight-line method. Annual capital allowance is equal to depreciation for tax purposes.
Calculate the tax savings in each year, if the rate of tax on chargeable income (taxable profits) is 25%.
Question 3
An asset costs RM80,000. Tax-allowable capital allowances is 25% on a reducing balance basis.
Calculate the tax savings in each year, if the rate of tax on chargeable income (taxable profits) is 25%.
Question 4
A company is considering whether or not to invest in a four-year investment project. The project will require the purchase of equipment costing RM800,000. This will have an estimated residual value of RM200,000 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 RM400,000 each year.
Tax is payable at 25% 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%.
Calculate the NPV of the project.
Question 5
A company is considering an investment in a non-current asset costing RM80,000. The
project would generate the following cash profits:
Year RM
1 50,000
2 40,000
3 20,000
4 10,000
The asset is eligible for capital allowances as follows:
(a) Initial allowance - 20%
(b) Annual allowance - 10%.
The asset is expected to have a residual value of RM20,000 at the end of year 4, when it will be disposed of. The after-tax cost of capital is 9%. The rate of tax on chargeable income (taxable profits) is 25%.
Calculate the NPV of the project:
(a) If tax is payable in the same year as profit is earned.
(b) If tax is payable one year in arrears.
Question 6
A company is considering whether to invest in a new item of equipment. The equipment would cost RM120,000 and have a useful life of four years, after which it would be disposed of for RM45,000.
The equipment will reduce running costs by RM50,000 each year (before taxation). Taxation is at the rate of 25%. The equipment would be eligible for capital allowances of 20% initially and 16% annually each year.
Taxation cash flows occur in the same year of the cost or benefit to which they relate. The cost of capital is 11% (after tax).
Calculate the NPV of the project and recommend whether the investment in the project is worthwhile.
Question 7
A company is considering an investment in an item of equipment costing RM150,000.
The equipment would be used to make a product. The selling price of the product at today's prices would be RM10 per unit, and the variable cost per unit (all cash costs) would be RM6.
The project would have a four-year life, and sales are expected to be:
Year Units of sale
1 20,000
2 40,000
3 60,000
4 20,000
At today's prices, it is expected that the equipment will be sold at the end of Year 4 for RM10,000. There will be additional fixed cash overheads of RM50,000 each year as a result of the project, at today's price levels.
The company expects prices and costs to increase due to inflation at the following annual rates:
Item Annual inflation rate
Sales 5%
Variable costs 8%
Fixed costs 8%
Equipment disposal value 6%
The company's money cost of capital is 12%. Ignore taxation.
Calculate the NPV of the project.