Question

A business planner and investment of 5,000,000 today.
The investment is depreciated on a straight-line basis over the life of 5 years and the residual value at the end of the project is assumed to be 500,000.
The investment will generate the following income over the next five years: 4,000,000, 4,500,000, 5,000,000, 5,500,000 and 6,000,000.
Payable operating expenses (operating expenses excluding depreciation) will amount to 60% of the income in the individual year.
The annual working capital requirement is assumed to be 10% of that on the following year's turnover.
The project will be part-financed with a serial loan (repaid with equal annual installments over the project's lifetime) of 5,000,000 at an interest rate of 2% pa.
The project's tax rate is 20%.

What will be the linear depreciation in year 4?

Answer 1

Investment cost	5,000,000
Less: Residual value	500,000
Non depreciable cost	4,500,000
Divided by: useful life	5
Annual depreciation	900,000
Linear depreciation in year 4	900,000