9. Use the following information for the problem. Year 2 4 MACRS Depreciation Al

Question

9. Use the following information for the problem. Year 2 4 MACRS Depreciation Allo wances for 3-year Property 33.33% 44.44% 14.82% 7.41% t a new distillation unit for $120,000. Such equipment has a 3-year MACRS classification. a) What is the book value of the distillation unit at the end of year 37 Use of the unit and the MACRS table above to find the book value. b) If the distillation unit will be sold in 3 years for $50,000, wh i sale? The tax rate is 25 0,000, what is the after-tax cash flow the sale? The tax rate is 25 (i.e., after-tax salvage value or after-tax resale value) from t percent. The distillation unit is used in a project that has a three-year life. The project is expected to generate the following operating cash flows. The initial investment required for the project consists only of the cost of purchasing the distillation unit. It does not require net working capital. It has no other cash flows besides the flow from selling the equipment at the end of the project in (b). If the required rate of return on the project is14 percent, what is the net present value of the project? Should it be accepted? Why? c) operating cash flows and the cash Operating cash flow (OCF) Year $40,000 50,000 70,000

Explanation / Answer

a) Book value of unit after 3 years:

At end of 1st year=1,20,000(1-0.3333)=$80,004

At end of 2nd year=80,004(1-0.4444)=$44,450.22

At end of 3rd year=44,450.22(1-0.1482)=$37,863

b) Salvage value after 3 years=$50,000

Capital Gain=50,000-37,863=$12,137

Tax rate=25%, no capital gain tax=12,137*0.25=3,034.25

Thus post tax salvage value=50,000-3,034.25=$46,965.75

c)  

PV of post tax salvage value=46,966*0.675=$31,702.05

Thus, total PV of cash flows=1,20,809.10+31,702.05=$1,52,511.15

NPV=1,52,511.15-1,20,000=$32,511.15

Since NPV is positive, the project should be accepted.

1 2 3 4=2*3 Year OCF($) Df @ 14% PV($) 1 40,000 0.8772 35087.72 2 50,000 0.7695 38473.38 3 70,000 0.6750 47248.01 120809.10

Related Questions

Navigate

• Browse (All)
• Browse 9
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.