Summer Tyme, Inc., is considering a new 3-year expansion project that requires a

Question

Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $993000. The fixed asset will be depreciated straight-line to 57000 over its 3-year tax life, after which time it will have a market value of $123000. The project requires an initial investment in net working capital of $80000. The project is estimated to generate $209000 in annual sales, with costs of $138000. The tax rate is 0.28 and the required return on the project is 0.08. What is the aftertax salvage value (SVNOT) in year 3? (Make sure you enter the number with the appropriate +/- sign)

Explanation / Answer

The asset will be depreciated to $57000, i.e., its book value after 3 years will be $57000 and it will be sold for $123000.

Tax on profit on sale = ($123000 - $57000) x 0.28 = $18,480

After-Tax Salvage Value (SVNOT) = $123000 - $18480 = $104,520

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