Wedge Corporation uses a discount rate of 14% and has a tax rate of 30%. The fol

Question

Wedge Corporation uses a discount rate of 14% and has a tax rate of 30%. The following cash flows occur in the last year of a 10-year equipment selection investment project:

Cost savings for the year = $180,000
Working capital released = $120,000
Salvage value of equipment = $25,000


At the end of the ten years when the equipment is sold, its net book value for tax purposes is zero. The total after-tax present value of the cash flows above is closest to:

A. $45,765

B. $48,465

C. $61,425

D. $71,145

I know that D is the anwer. Would someone provide me with their work so that I can check my answer?

Explanation / Answer

Total after tax cashflow = (cost savings+salvage value)*(1-tax rate)+working capital released = (180,000+25,000)*(1-30%) + 120,000 = 263,500

Present value of $1 received 10 years from now at 14% discount rate = 0.270

So present value of $263,500 = 263,500*0.270 = $ 71,145

Hope this helped ! Let me know in case of any queries.

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