Some new equipment under consideration will cost $2,300,000 and will be used for

Question

Some new equipment under consideration will cost $2,300,000 and will be used for 5 years. Net working capital will experience a one time increase of $674,000 if the equipment is purchased. The equipment is expected to generate annual revenues of $1,800,000 and annual costs of $576,000. The project falls under the seven-year MACRs class for tax purposes, the tax rate is 36 percent, and the cost of capital is 15 percent. The project's fixed assets can be sold for $552,000 at the end of the project's life.

1. What is the net cash flow for year 5? Please explain how to find Depreciation which is equal to 205,390 and the taxes at 36 percent.

Explanation / Answer

Year 5 Depreciation = Investment x MACRS% = 2,300,000 x 8.93% = 205,390

Net Cash Flow for year 5 = Net Income + Depreciation + NWC + After-tax Salvage Value

Book Value of the asset after 5 years = Investment x (1 - accumulated depreciation) = 2,300,000 x 22.31% = 513,130

After-tax Salvage Value = (552,000 - 513,130) x (-36%) + 552,000 = 538,007

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.