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Mehgam’s currency, the Peso (MP), is currently trading at MP72 per $1. Setting up the
manufacturing base in Mehgam will require an initial investment of MP2,500 million
immediately, to cover the cost of land and buildings (MP1,250 million) and machinery
(MP1,250 million). Tax allowable depreciation is available on the machinery at an annual
rate of 10% on cost on a straight?line basis. A balancing adjustment will be required at the
end of year five, when it is expected that the machinery will be sold for MP500 million
(after inflation). The market value of the land and buildings in five years’ time is estimated
to be 80% of the current value. These amounts are inclusive of any tax impact.
Please explain meaning of last line and its implication.
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