Thornley Machines is considering a 3-year project with an initial cost of $630,0
ID: 2651901 • Letter: T
Question
Thornley Machines is considering a 3-year project with an initial cost of $630,000. The project will not directly produce any sales but will reduce operating costs by $315,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $69,000. The tax rate is 34 percent. The project will require $15,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 11 percent? Why or why not?
yes; The NPV is $81,795.85
yes; The NPV is $141,205.68
yes; The NPV is $43,140.00
no; The NPV is $96,795.85
yes; The NPV is $25,550.41
Thornley Machines is considering a 3-year project with an initial cost of $630,000. The project will not directly produce any sales but will reduce operating costs by $315,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $69,000. The tax rate is 34 percent. The project will require $15,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 11 percent? Why or why not?
Explanation / Answer
Depreciation per year= 630000/3= 210000
Tax Saving on Depreciation= 210000*34%= 71400
Salvage =69000
Capital gain tax on sale= 69000*34%=23460
Net Proceed from Sale=69000-23460= 45540
Annual Cost Saving=315000
Year Annual Saving Initial Outflow Salvage Net Saving PVF11% PV 0 $0.00 -$630,000.00 -$630,000.00 $1.00 -$630,000.00 1 $279,300.00 $279,300.00 $0.90 $251,621.62 2 $279,300.00 $279,300.00 $0.81 $226,686.15 3 $279,300.00 $45,540.00 $324,840.00 $0.73 $237,520.21 NPV $85,827.98Related Questions
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