Taking into account the annual capital allowances for the machine, the annual tax liability and the annual cash flows, evaluate the viability of the four-year contract to supply the components.
Jireh Limited also manufactures prefab components for the housing industry. They have just been offered a new four year contract to supply a component, subject to them meeting certain quality requirements set by GREDA Ghana. The production manager is concerned that the current machine, which has been fully
1. Revenues and Costs – The estimated annual revenues and costs from the project for the next four years are:
Year Revenues (in £) Costs (in £)
1 800,000 350,000
2 850,000 385,000
3 880,000 410,000
4 920,000 435,000
2.
(i) Capital allowances – The new machine will attract a 20% declining balance writingdown allowance each year.
(ii) The company pays corporate tax at a rate of 20% of taxable profit and this is paid in the year the profit is generated.
3. It is estimated that the machine will be sold for £350,000 at the end of year 4
4. The company uses an after tax cost of capital of 18% for investments of this risk class.
Required:
(i) Taking into account the annual capital allowances for the machine, the annual tax liability and the annual cash flows, evaluate the viability of the four-year contract to supply the components.
Step by step
Solved in 3 steps with 3 images
