1) An asset used in a four-year project falls in the five-year MACRS class for t
ID: 2705932 • Letter: 1
Question
1) 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 $6,190,000 and will be sold for $1,390,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
2)
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.00 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 $2,180,000 in annual sales, with costs of $875,000. If the tax rate is 30 percent, what is the OCF for this project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
3)
Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 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 $2,050,000 in annual sales, with costs of $745,000. The tax rate is 30 percent and the required return on the project is 15 percent. What is the project
1) 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 $6,190,000 and will be sold for $1,390,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset? Refer to Table 10.7. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
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 $6,190,000 and will be sold for $1,390Explanation / Answer
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 1,226,880.
If proceeds from its sale are 1,750,000, then book gain will be 523,120, and tax at 34% will be 177,860.80. So net proceeds from the sale will be 1,750,000, less tax of 177,860.80, leaving a net after tax value of 1,572,139.20
2.CF0 = $-3,888,000 - $432,000
CF0 = $-4,320,000
Annual Depreciation = [3,888,000 - $302,400]/3
Annual Depreciation = $1,195,200
Net Income = Sales - Costs
Net Income = $3,456,000 - $1,382,400
Net Income = $2,073,600
EBIT = [Net Income - Depreciation] * [1 - TaxRate]
EBIT = [$2,073,600 - $1,195,200] * [1 - 30%]
EBIT = [$878,400] * [70%]
EBIT = $614,880
FCF = EBIT + Depreciation
FCF = $614,880 + $1,195,200
FCF = $1,810,080
Free cash flows
-4,320,000 $1,810,080 $1,810,080 $2,242,080
NPV Calculation are performed using this online NPV Calculation tool at http://thinkanddone.com/en-us/online-npv...
DCF0 = -4320000/(1+0.18)^0 = -4320000
DCF1 = 1810080/(1+0.18)^1 = 1533966.1
DCF2 = 1810080/(1+0.18)^2 = 1299971.27
DCF3 = 2242080/(1+0.18)^3 = 1364599.11
NPV = $-121,463
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