Sandy Inc., is considering a new three-year expansion project that requires an i

Question

Sandy Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,080,000 in annual sales, with costs of $500,000. If the tax rate is 35 percent, what is the OCF for the project?

a. 900,675

b.1,021,550

c.1,189,000

d.1,210,800

e. 1,342,000

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,100,000 and will be sold for $1,300,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset?

a. 800,675

b. 921,550

c. 1,069,750

d. 1,210,800

e. 1,342,000

please leave short explanation for best

Explanation / Answer

Sandy Inc.

Ans is e. $1,342,000

Now, annual sales for three years less its depreciation and expenses will give PBT.

PBT - Tax = PAT

OCF = PAT + depreciation - Cash Outflow.

Answer 2.

Using MACRS depreciation, 5 year class, the total depreciation allowed through 4 years will be 82.72% of cost, leaving 17.28% as the Net Book Value when the project is completed or $1,054,080

If proceeds from its sale are $1,300,000, then book gain will be $245,920, and tax at 35% will be $86,072. So net proceeds from the sale will be $1,300,000, less tax of $86,072, leaving a net after tax value of 1,213,928.00

answer is d.

year 1 cash out flow $ 27,00,000.00 depreciation $     9,00,000.00 Value at year end $ 18,00,000.00 year 2 depreciation $     9,00,000.00 Value at year end $     9,00,000.00 year 3 depreciation $     9,00,000.00 Value at year end $                        -  

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