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 (x$1,000). 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 worth in real dollars. Cash flows are ih actual dollar x $1,000. Actual $ O&M; Taxable After Tax Year Init Cost Savings Costs Depr. Incoie Tates CashPlye Real o ($20,000) $18,000 ($10,000) $18,000 ($10,000) $18,000 ($10,000) 2 3 Book Value Depr Recapture/Loss

Explanation / Answer

Year Actual initial cost Savings O& M Costs Depr. Taxable Income Taxes After Tax cash flow Add back : depn. Annual actual $ opg. C/F Real $ PV F at 15% PV at 15% 0 -20000 -20000 -20000 1 -20000 1 18000 -10000 -6666 1334 533.6 800.4 6666 7466.4 7242.408 0.86957 6297.75 2 18000 -10000 -8890 -890 0 -890 8890 8000 7527.2 0.75614 5691.64 3 18000 -10000 -2962 5038 2015.2 3022.8 2962 5984.8 5462.165 0.65752 3591.46 NPV at real rate -4419.15 Depn. Recapture lost -524.8 Net NPV -4943.95 Depn. Recapture loss 4 th year tax shield lost 7.41%*20000= 1482 PV in real $ = 1482*40%(tax)*(1-0.03)^4 524.8

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