27 Jun List Out Full Steps* LTT Technology Company Ltd Plans
list out full steps*
LTT Technology Company Ltd plans to open a new factory in Thailand, which is expected to have a 6- year economic life. The following cash flows are noted for the project:
1. The factory will be built on a piece of land freely provided by the Thail government.
2. The factory will be constructed at a cost of $18 million. The factory will be depreciated at its full cost on a straight line basis over its estimated useful life of 12 years. The factory can be sold at $5 million at the end of Year 6.
3. Machinery will have to be purchased for the factory at a cost of $6 million. For tax purpose, machinery will be fully depreciated at its full cost (i.e. to zero value) on a straight-line basis over its estimated useful life of six years. Salvage value of the machinery at the end of Year 6 is 10% of its original cost.
4. Equipment will also have to be purchased at a cost of $1,200,000. Equipment will also be depreciated at its full costs on a straight-line basis over its estimated useful life of six years. Its salvage value is equal to zero.
5. In addition, an initial investment of $2 million in working capital is required today and at the end of Year2. The working capital will be fully recovered at the end of project.
6. Under the new tax rules in Thailand, LTT will receive a tax rebate of $500,000 as an incentive to undertake an investment project in Thailand at the end of Year 6. The management of LTT believes that the new factory will generate pre-tax cash operating income of $8 million a year in its first two years of operation and $16 million in each of the subsequent 4 years. LTT’s corporation tax rate is 40% and its cost of capital is 15%. Round your answer to nearest dollar
a) Calculate the cost of investment. (4 marks)
b) Calculate the present value of after-tax cash operating income. (6 marks)
c) Calculate the present value of tax savings from depreciation. (6 marks)
d) Calculate the present value of after-tax salvage value. (6 marks)
e) Based on the net present method, should the project be undertaken? (5 marks)
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