A company is considering the investment of 80K in plant and machinery.
The investment would take place immediately and would result in estimated cash inflows of 30K per annum for the next four years. The plant and machinery would be sold after four years for an estimated 10K.
1. Advise on whether the company should go ahead with the investment, assuming a corporation tax rate of 33%, a WDA of 25%, and a cost of capital of 10%. You may assume that all tax transactions have a one-year delay.
2. Your boss says: ‘We only assess capital projects before tax. Every firm has to pay tax so we can ignore it’. Do you agree with this statement? Explain your answer.
3. Explain how inflation affects the rate of return required on an investment project and the distinction between real and nominal (‘money terms’) approach to the evaluation of an investment project under inflation.
Learners are required to search at least 2 or 3 academic articles and identify all sources/sites used.
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