Project Evaluation for a Manufacturing Firm in Brisbane

MANAGERIAL FINANCE
Task 2 – Project Evaluation
STUDENT ID:
[Pick the date]

Question 1
a) As per the given details, a Brisbane based manufacturing firm intends to setup a new plant
which would have an estimate life of 10 years. The summary of the expected cash flows as
provided is detailed below.
 For the given project, an upfront cost of $ 3 million would be required.
 It is expected that at the end of useful project life, the salvage value (post tax) of
the equipment purchased at t=0 would be $ 200,000 or $ 0,2 million.
 Also, it is known that at t-5, the machine would require refurbishment which would
lead to an incremental cash flow of $ 2 million
 Besides, it is known that for all the 10 years of useful life of the project, the after
tax profits generated would be $ 0.7 million annually.
One of the pivotal elements which is taken as a cost for computation of after tax profits is
depreciation. Thus, in the computation of $ 0.7 million annual after tax profits, depreciation
has been deducted. However, depreciation is a non-cash based expense and hence needs to be
added back (Damodaran, 2015).
Equipment Initial Cost = $ 3 million
Salvage Value = $ 0.2 million
Annual Depreciation using the straight line method = (3-0.2)/10 = $ 0.28 million
However, incremental expenditure of $ 2 million has been incurred at t=5, hence this amount
would be added to the depreciation in the later years (Petty, et. al., 2015).
Thus, incremental depreciation from 6th year onwards = 2/5 = $ 0.4 million
From the above discussion, the following depreciation would be added so as to obtain the
project cash flows.
From t=1 to t=5, annual depreciation charge = $ 0.28 million
From t =6 to t=10, annual depreciation charge = $ 0.28 + $0.4 = $ 0.68 million
Considering the above, the project cash flows are estimated below.