PART I You purchased an asset 3 years ago at a cost of $135,000 and sold it toda

Question

PART I

You purchased an asset 3 years ago at a cost of $135,000 and sold it today for $82,500. The equipment is 5-year property for MACRS. The MACRS table values are 0.2000, 0.3200, 0.1920, 0.1152, 0.1152, and 0.0576 for Years 1 to 6, respectively. Which one of the following statements is correct if the tax rate is 34 percent?

A. The current book value is $41,800.

B. The taxable amount on the sale is $38,880.

C. The tax due on the sale is $14,830.80.

D. The book value today is $37,478.

E. The after-tax salvage value is $38,880.

PART II

A project is expected to create operating cash flows of $37,600 a year for 3 years. The initial cost of the fixed assets is $98,000. These assets will be worthless at the end of the project. Also, $3,200 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 14 percent?

A. $11,746.73

B. $12,011.98

C. $10,927.87

D. $11,746.73

E. $12,011.98

Explanation / Answer

1) Book Value today = Purchase Price x (1 - accumulated depreciation)

= 135,000 x (1 - 0.2 - 0.32 - 0.192) = 38,880

Tax on sale = (Sale Price - Book Value) x Tax rate

= (82,500 - 38,880) x 34%

= $14,830.80

Hence, C is correct

2) On a financial calculator

I/Y = 14%, CF0 = -98000 - 3200 = -101,200, CF1 = CF2 = 37,600, CF3 = 37,600 + 3,200 = 40,800

=> Compute NPV = -$11,746.73

Hence, D is correct.

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