***Background: Grant Publishing just undertook a project that required a $330,00
ID: 2686778 • Letter: #
Question
***Background: Grant Publishing just undertook a project that required a $330,000 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%. The salvage value at the end of five years turns out to be $100,000. The project's total termination cash flow is 430,000.
In five years, Grant Publishing actually is able to get $130,000 for the equipment even though it has a book value of only $100,000 and the project
Explanation / Answer
Case 1: BV is 100,000, Salvage is 100,000 Net Salvage = salvage value – tax on profit Net proceeds = SV – T (SV – BV) = SV as BV=SV. So TCF = 330,000+100,000 = 430,000 Case 2: BV is 100,000, Salvage is 130,000 Net Salvage = salvage value – tax on profit Net proceeds = SV – T (SV – BV) = 130000-40%*(130,000-100,000) = $118,000 So TCF = 330,000+118,000 = 448,000 Case 3: BV is 100,000, Salvage is 50,000 Net Salvage = salvage value – tax on profit Net proceeds = SV – T (SV – BV) = 50000-40%*(50,000-100,000) = $70,000 So TCF = 330,000+70,000 = 400,000
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