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Restatement of investment appraisal
In the following solution the tax allowances in relation to the initial outlay on equipment are evaluated separately. Other approaches are adequate. The tax-adjusted cost of the capital expenditure is able to be found by deducting the present value of the tax savings generated by exploiting the writing-down allowance from the initial outlay. It is supposed that the available allowances can be set off against profits immediately that is beginning in the financial year in which the acquisition of the asset occurs. This acquiesce five sets of WDAs as the project straddles five tax years. The solution presumes no scrap values.
Present value of tax savings = 178 i.e., $178000
The effective cost of the equipment is as
[Nominal outlay - present value of tax savings]
= [$900,000 - $178,000]
= $722,000.
The cash flow profile is as
NPV = + 357 i.e., $357000
Recommendation
Therefore the equipment purchase is acceptable and should be undertaken although an analysis of its risk is as well recommended.
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