Question

HOW DO I GET THE BOOK VALUE OF .240MILLION given in the solution for year 8?(when they sell the asset)

THANK YOU

Q-Search in Document Home Review View 2+ Share A Insert Design Layout References Calibri (Body) - 12 -A A A B IV . obe X, X A A i View an Example Mailings A E Documents Acrobat + E. . AaBbc DdEe Paste = = = AaBaccDdte AaBbCcDc AabCcDdE: AaBb No Spacing Heading 1 Heading 2 Title AabhccDE Subtitle Normal Styles Pane e firm ivestr end vorkin ating Question Help Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $4 million and which it currently rents out for $115,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.2 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $525,000. Finally, the project requires an initial investment into net working capital equal to 10 percent of predicted first-year sales. Subsequently, net working capital is 10 percent of the predicted sales over the following year. Sales of protein bars are expected to be $4.7 million in the first year and to stay constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are 80 percent of sales, and profits are taxed at 30 percent. a. What are the free cash flows of the project? b. If the cost of capital is 15%, what is the NPV of the project? Compute the FCF in year 8 of the project. In year 8 the machinery is sold so the sales price and the taxes must be accounted for. Note that the book value of the machinery is still $0.240 millon when sold, and only the difference between the sale price ($0.525 million) and the book value is taxed. Also in year 8 the NWC ($0.47 million) is recovered at book value and hence its recovery is not taxed at all. FCFg = ($4.7 million - $3.76 million - $0.115 million - $0.12 million) (1 -0.3) + $0.12 million +($0.525 million -0.3($0.525 million - $0.240 million)) + $0.47 million = $1.523 million Question is complete. Page 1 of 1 O words English (United States) E = - + 200%

Answer 1

Cost of equipment...... 1.2 million

Useful life is 10 years. Salvage Value assumed 0.

Per year Depreciation = (Cost of Asset - Salvage Value)/Useful life

(1.2-0)/10

=0.12 Million.

Project life is 8 years. So 8 years Depreciation provided = 0.12*8= 0.96 Million

Book value at end = Cost of Asset - Depreciation provided in 8 years

=1.2 Million - 0.96 Million

=$0.24 Million.

So book value at end of project 8 year end is 0.24 Million