Your firm is contemplating the purchase of a new $672,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $672,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $55,000 at the end of that time. You will save $175,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $50,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Required: What is the aftertax salvage value of the equipment?

Explanation / Answer

after tax salvage value = 55000 * (1-0.32) = 37400

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