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Calculate Capital Cost Allowance And Present Value Of A Project

Question

$4,800,000 is required at the start of Project XP-05/3 for purchasing capital equipment. Management of Itex, the company undertaking the Project, intends to partially finance this equipment purchase by borrowing $3,200,000 from the local bank. The remaining $1,200,000 will be provided by Itex. The bank charges 12 % half-yearly compounding interest for the loan. The loan, including principal and interest, will be fully re-paid by eight equal, half-yearly payments. The first of these payments will be made a half a year after receiving the loan. The capital equipment will be sold for an estimated $1,000,000 at the termination of the Project.

The capital cost allowance rate applicable for this type of capital equipment is 30%. MARR (the minimum attractive rate of return) for the company is 15%. The income tax rate is 40%

Determine:

(i) the amount of the half-yearly loan payments

(ii) the loan outstanding immediately after the fifth payment

(iii) the interest portion of the sixth payment

(iv) the opportunity cost of the Project (present value)

(v) the capital cost allowance in the third year of the Project

(vi) the capital cost allowance in the final year of the Project (include terminal loss, etc. if any)

(vi) the present value of the after-tax cost of the capital equipment (consider initial cost, salvage value and the after tax effect of the capital cost allowance)

 

Summary

The question belongs to Finance and it discusses about calculating outstanding loan, opportunity cost, capital cost allowance and present value of a project.

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