Npv with taxation and inflation

I am sorry but I do not have the Kaplan text. If it is a past exam question and you let me know the name of it, then I can find it. Otherwise you will have to type the extract from the question that details the tax position and then I will try and explain for you.

SC Co is evaluating the purchase of a new machine to produce product P, which has a short product life-cycle due to rapidly changing technology. The machine is expected to cost $1 million. Production and sales of product P are forecast to be as follows Year Production and sales (units/year) 1 35.000 2. 53.000 3. 75.000 4. 36.000 The selling price of product P (in current price terms) will be $20 per unit, while the variable cost of the product (in current price terms) will be $12 per unit. Selling price inflation is expected to be 4% per year and variable cost inflation is expected to be 5% per year. No increase in existing fixed costs is expected since SC Co has spare capacity in both space and labour terms. Producing and selling product P will call for increased investment in working capital. Analysis of historical levels of working capital within SC Co indicates that at the start of each year, investment in working capital for product P will need to be 7% of sales revenue for that year. SC Co pays tax of 30% per year in the year in which the taxable profit occurs. Liability to tax is reduced by capital allowances on machinery (tax-allowable depreciation), which SC Co can claim on a straight-line basis over the four-year life of the proposed investment. The new machine is expected to have no scrap value at the end of the four-year period. SC Co uses a nominal (money terms) after-tax cost of capital of 12% for investment appraisal purposes. Calculate the net present value In the answer the WDA is given at a value of 75.000, which im not clear where it comes from the answer is given below Year Year 0 1 2 3 4 $ $ $ $ Total contribution 287,0 445,2 645,8 317,3 Taxation -86,1 -133,6 -193,7 -95,3 WDA tax benefit 75,0 75,0 75,0 75,0 Initial investment -1,000 Working capital -50,96 -29,3 -37,9 59,2 59,0 –––––– –––––– ––––––– –––––– –––––– Net cash flows (1,050.9) 246,6 348,8 586,2 356,2 Discount factor at 1.000,0 0.893 0.797 0.712 0.636 12% –––––––– –––––– ––––––– –––––– ––––––– Present value (1,050,9) 220,2 278,0 417,4 1,366,6 NPV =$ 91,154

The machine costs $1M. The capital allowances are given on a straight-line basis, and so are $1M/4 = 250,000 per year. Tax is 30%, and so the tax saved due to the capital allowances is 250,000 x 30% = 75,000 per year.

AAAAAAAAAAAAAAAAAAAAA :-) I Did the calculation up to 1mln/4=250.000 :-) i forgot the 30% tax rate to multiply it with te figure above :-) Thats why i was wondering where did this come from :-) thanks thanks for sure , you gone hear me again :-) hope i will not bother you

You are welcome :-)