Summer Tyme, Inc., is considering a new 3-year expansion project that requires a
ID: 2789399 • Letter: S
Question
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $972000. The fixed asset will be depreciated straight-line to 74000 over its 3-year tax life, after which time it will have a market value of $97000. The project requires an initial investment in net working capital of $58000. The project is estimated to generate $223000 in annual sales, with costs of $132000. The tax rate is 0.32 and the required return on the project is 0.10. What is the aftertax salvage value (SVNOT) in year 3? (Make sure you enter the number with the appropriate +/- sign)
Explanation / Answer
Book value of the fixed asset at the end of year 3 = $74,000
Sale value of fixed asset at the end of year 3 = $97,000
Gain on sale of fixed asset = Sale value - Book value = $97,000 - $74,000 = $23,000
Tax rate = 0.32
Tax payable on gain on sale of fixed asset = $23,000 * 0.32 = $7,360
After tax salvage value = Sale value - Tax payable on gain on sale
After tax salvage value = $97,000 - $7,360 = $89,640
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