4. Salvage value considerations Aa Aa Grant Publishing just undertook a project

Question

4. Salvage value considerations Aa Aa Grant Publishing just undertook a project that required a $270,000 investment in NowC, which will be recovered fully at the end of the project's life in five years. At that time, the required equipment will not be depreciated fully and still will have a book value of $100,000. The firm's tax rate is 40%. If the salvage value at the end of five years turns out to be $100,000, what will be the project's total termination cash flow? O s390,000 O $430,000 O $370,000 440,000 O O 420,000 Suppose that in five years, Grant Publishing actually is able to get $160,000 for the equipment even though it has a book value of only $100,000. What is the project's terminal year cash flow now? O 414,000 O $402,000 O $448,000 456,000 O O 406,000 Now suppose the equipment gets sold for $50,000 in five years. What is the project's terminal year cash flow now? O $356,000 340,000 O s O $336,000 $374,000 O s358,000

Explanation / Answer

Given

Cash Outflow at the begining of Year = $270000

Cash Inflow at the end of Five Year = $270000

Salvage value of Equipment = $100000

Book Value of Equipment = $100000

So Capital Gain = 100000 - 100000 = 0

Tax on Capital Gain = 0

So Total Cash flow at Termination = Cash Inflow at the end of Five Year + Salvage Value of Equipment + Tax on Capital Gain

= 270000 + 100000 + 0 = $ 370000

So Answer is C : $ 370000

If Salavge Value is $160000

Capital Gain = 160000 - 100000 = $ 60000

Tax on capital Gain = 60000 * 40 % = $24000

Total Cash flow at Termination = Cash Inflow at the end of Five Year + Salvage Value of Equipment - Tax on Capital Gain

Terminal Cash Flow = 270000 + 160000 - 24000 = $ 406000

So Answer is E: $ 406000

If Equipment is Sold for $50000

Capital Loss = 100000 - 50000 = $ 50000

Tax benefit on Capital Loss = $ 50000 * 40 % = $20000

Total Cash flow at Termination = Cash Inflow at the end of Five Year + Salvage Value of Equipment + Tax benefit on Capital Loss

Terminal Cash Flow = 270000 + 50000 + 20000

= $340000

So Answer is B : $340000

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