Chapter 5 • Practical aspects of investment appraisal
3 Plant at the factory had a tax written down value of £1.2 million at 1 January 20X6.
For tax purposes, the plant will attract capital allowances on a reducing balance
basis at 25 per cent p.a., starting in the year of acquisition irrespective of the exact
date of acquisition during the year. In the year of disposal, no annual writing-down
allowance will arise, but the difference between the written down value and the dis-
posal proceeds is either given as an additional tax allowance or charged to tax
according to whether the written down value exceeds the disposal proceeds or vice
versa.
The plant is old and specialised, and would not be transferred to the business’s
other factories. It is expected that it could be sold for £0.6 million on 31 December
20X6, but by 20X8 it would have no market value.
4 If sales of Zappers were to cease in 20X6, it is estimated that sales revenues from
other products of the business would benefit to the extent of 50 per cent of the lost
sales revenues from Zappers. These other products have variable costs that aver-
age 30 per cent of sales revenue.
5 Working capital equal to 10 per cent of each year’s sales revenues is required for all
of the business’s products. This needs to be in place by the start of each year.
6 Redundancy and other closure payments will be £0.8 million if production ceases in
20X6, and £1.0 million if it ceases in 20X8. In either case, the payment will be made
on 31 December of the year concerned.
7 The business’s rate of corporation tax is 30 per cent, and it is expected to remain at
this rate for the foreseeable future. The cash flow effects of tax are expected to
occur at the end of the year of the event giving rise to them.
8 The directors have a target return of 8 per cent p.a. in ‘real’ terms for all activities.
9 The business’s accounting year end is 31 December.
General inflation is expected to run at the rate of 3 per cent for 20X7 and 4 per cent
for 20X8 and subsequent years.
Assume that all sales occur on the last day of the year concerned.
Prepare a schedule that derives the annual net incremental cash flows of ceasing
Zapper production and closing of the factory in 20X6, relative to continuing production
until 20X8, and use this to assess the decision on the basis of net present value.
Work to the nearest £10,000.There are sets of multiple-choice questionsand missing-word questions
available on the website. These specifically cover the material contained in this
chapter. These can be attempted and graded (with feedback) online.
There is also an additional problem, with solution, that relates to the material
covered in this chapter.
Go to http://www.pearsoned.co.uk/atrillmclaneyand follow the links.‘