22-23. A project for a barge water transportation of raw materials did not yield

Question

22-23. A project for a barge water transportation of raw materials did not yield estimated savings and is being terminated. The market value of the barge is $14,000 ($1,00). The project had the following cash flows in actual dollars. The company uses a real interest rate i, = 15% for this product, and inflation is expected to maintain at a 3% average. The company uses MACRS depreciation and has a combined tax rate is 40% . Estimate the after tax cash actual dollar cash flows to terminate the project at the end of year 3, convert the actual dollar cash flows to real dollars, and compute the net present worthinsaldollars. Cash flows are ih actual dollar × S 1,000. ' Actual S O&M; Taxable After Tax Year Init Cost Savings Costs Depr niseineTaaes Cash Flow RealsS o ($20,000) 2 3 Book Value $18,000 ($10,000) $18,000 ($10,000) $18,000 (S10,000) Depr Recapture/Loss

Explanation / Answer

1/(1+r)^n Year Capital (Outflow) /(inflow) Savings O&M Cost Depn Taxable Income Taxes 40% After tax cash flow Real Value $/(1+.03)^n Discount Factor PV 0                               (20,000)    (20,000)          (20,000)                   1    (20,000) 1                   18,000         (10,000)         2,000      10,000      (4,000)         4,000               3,883    0.869565         3,377 2                   18,000         (10,000)         3,600      11,600      (4,640)         3,360               3,167    0.756144         2,395 3                                   2,480                   18,000         (10,000)         2,880      10,880      (4,352)         6,128               5,608    0.657516         3,687 Net Worth in Real $    (10,541) Calculation of Depreciation Water Transporation System comes under the category of 10 years Year 10-year Rate Depreciation                                            1 10.00%              2,000                                            2 18.00%              3,600                                            3 14.40%              2,880 Total Depreciation Charged              8,480 Cost of the system           20,000 WDV at the time of termination           11,520 Sales Value           14,000 Gain (14000-11520)              2,480

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