Calculate capital allowance and tax savings for each years

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Reference no: EM133616794

Problem: Marston Ltd is considering manufacturing a new product. This requires machinery costing £50,000 with a life of five years and terminal value of £6,000. Profit from the project will be £15000 per annum. An investment of working capital of £9,000 will be required for the duration of the project. Tax allowances on the machine are at 25% per annum reducing balance. At the end of the project life, a balancing charge or allowance will arise equal to the difference between the scrap proceeds and the tax written down value. Tax is payable at a rate of 35%. Tax cash flows on profits occur in the same year as the profits giving rise to the tax charge. The cost of capital is 12%. Required (1) Calculate capital allowance and tax savings for each of the years. (2) Calculate net cashflow of the projects for each of the years. (3) Calculate NPV and suggest should the project be accepted.

Reference no: EM133616794

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