Question

Pear Orchards is evaluating a new project that will require equipment of $223,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $50,200. However, the company plans to keep the equipment for a different project in another state. The tax rate is 35 percent. What aftertax salvage value should the company use when evaluating the current project? Multiple Choice o $50,200 $50200 • $38,534 0 $54,283 0 $0 0 $46,117

Answer 1

Answer to Question 1:

Initial Investment = $223,000
Useful Life = 4 years

Depreciation Year 1 = 20.00% * $223,000
Depreciation Year 1 = $44,600.00

Depreciation Year 2 = 32.00% * $223,000
Depreciation Year 2 = $71,360.00

Depreciation Year 3 = 19.20% * $223,000
Depreciation Year 3 = $42,816.00

Depreciation Year 4 = 11.52% * $223,000
Depreciation Year 4 = $25,689.60

Book Value at the end of Year 4 = $223,000.00 - $44,600.00 - $71,360.00 - $42,816.00 - $25,689.60
Book Value at the end of Year 4 = $38,534.40

After-tax Salvage Value = Salvage Value - (Salvage Value - Book Value) * tax rate
After-tax Salvage Value = $50,200.00 - ($50,200.00 - $38,534.40) * 0.35
After-tax Salvage Value = $50,200.00 - $4,083
After-tax Salvage Value = $46,117

Answer to Question 2:

Initial Investment = $673,000
Useful Life = 4 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $673,000 / 4
Annual Depreciation = $168,250

After-tax Salvage Value = Salvage Value * (1 - tax rate)
After-tax Salvage Value = $180,000 * (1 - 0.34)
After-tax Salvage Value = $118,800

Initial Investment in NWC = $50,000
Annual Operating Cash Flow = $215,900
Discount Rate = 15%

Net Present Value = -$673,000 - $50,000 + $215,900 * PVA of $1 (15%, 4) + $50,000 * PV of $1 (15%, 4) + $118,800 * PV of $1 (15%, 4)
Net Present Value = -$673,000 - $50,000 + $215,900 * 2.8550 + $50,000 * 0.5718 + $118,800 * 0.5718
Net Present Value = -$10,098