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Case Study on Swindodn plc - Research Paper Example

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Capital investments involve large sums of money. Thus, errors in deciding whether to pursue a long term investment is very costly especially when the total cash inflows are less than the cost of the investment. Finance teaches us the theories on whether to pursue or not an investment before the actual cash outlay begins(Weston, 1993…
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Case Study on Swindodn plc
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Download file to see previous pages Thus, fundamentals of accounting tells us that the cost of an assets includes cash paid outright when the assets is bought plus the amounts that will be paid in the future. Such future amounts also includes interest expenses paid for the use of borrowed money(Brigham, 1985)
For there are two ways to get an asset, through investment of cash and through creation of loans or long term debts or bonds. In addition, the cost of the assets includes all other cash outlay that will put such assets into operation. Meaning, the additional cost includes trial runs, hauling or delivery expenses to deliver the drills from the supplier's warehouse to the purchaser's factory or place of business(Ross, 1996). For, the cost of capital here includes the drill and platform cost of 14,000,000 and the 1,000,000 additional costs. Evidently, the cost of amount that the company will have to pay in order to put the long term investment into operation.
The prior accelerated cost recovery system had been the product of the economic recovery tax act of 1981. Also, the MACRS was a complete going away from the prior tax depreciation procedures instituted by fundamentals of financial accounting. Meaning, the prior depreciation methods took cognizance of including the salvage value or scrap value of the assets(Ross, 1996). The prior depreciation methods include the straight line method, the sum of the years digits, the double declining method, the 150 percent declining method, the units of production method, the hours of production used method and tools expense methods among others. This prior system that had been closely similar to the financial accounting depreciation methods has now been changed to mechanical computation called MACRS. Distinctly, the MACRS

c) The project's Operating Cash Flows (inflows) (15 marks)
Cash inflows
Year
Cash inflows
1
3,500,000
0.8850
3,097,500
2
4,000,000
0.7831
3,132,400
3
6,000,000
0.6931
4,158,600
4
8,000,000
0.6133
4,906,400
5
12,000,000
0.5428
6,513,600
Total for 5 yrs
33,500,000
21,808,500
Less depreciation 5 yrs
14,130,000
Cash inflows before tax
7,678,500
Tax 40%
3,071,400
Cash inflows after tax
4,607,100
Add back depreciation
14,130,000
Cash inflows
18,737,100
The cash inflow for the first year is 3,500,000 multiplied by the present value factor of 1 of .8850 results to cash inflow of 3,097,500. on the second year, the 4,000,000 multiplied by the present value factor of 1 of .78831 results to cash inflow of 3,132,400. on the third year, 6,000,000 multiplied by the present value factor of 1 of .6931 results to cash ...Download file to see next pagesRead More
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