Problem
A. A mining project requires the purchase of new drilling equipment at a cost of $57500. A further $36000 will be spent on transport, installation and initial maintenance of the equipment, at the very beginning of the project. Of this amount, 25% constitutes maintenance costs and will be written off in Year 1, and the remainder will be capitalized.
Excluding depreciation, what is the amount that will be claimed as tax deduction in Year 1?
B. A project will increase revenue from $3.5 million to $4.5 million. Wages are 60% of revenue. Maintenance on the machine will be $26,000 less than it is on the machine that will be replaced.
What is the incremental revenue that will result from accepting this project? (Hint: This is not the same wording as the quiz question built into the video - read it carefully.)
C. Project Beta is a 8-year project which requires an initial outlay of $5,000. This outlay will be depreciated using straight-line depreciation over the life of the project. It will generate incremental revenue of $1600 per year. The value of incremental, after-tax earnings is $555 per year. The project will require Net Working Capital equal to 10% of incremental revenue.
What is the value of incremental free cash flow in Years 1 to 8?
D. Equipment with a book value of $6,000 will be sold at the end of a project for a salvage value of $9,000. The tax rate is 25%. What is the tax effect resulting from the profit or loss from the sale of the equipment (where a negative number means tax is payable and a positive number means that there is a tax shield)?
E. Revenue from a project is expected to be $2000 per year in real terms (i.e. an identical project would earn $2000 in revenue today). If the expected inflation rate is 2.7%, what is the nominal value of revenue (the actual number of dollars received) 5 years from now?