Question: Konika Ltd. is considering manufacturing a new product. This requires machinery costing Tk. 20,000 with a life of four years and a terminal value of Tk.5,000. Profits before depreciation from the project will be Tk.8,000 per annum. An investment of working capital of Tk.2,000 will be required for the duration of the project.
Tax allowances on the machine are 25% p.a. reducing balance. At the end of the project's life a balancing charge or allowance will arise equal to the difference between the scrap proceeds and the tax written down value.
Tax is payable at the rate of 35%. Tax cash flows on profits occur in the same year as the profits giving rise to the tax charge. The cost of capital is 15%.
Should the project be accepted? Show your justifications.