Question

niveX M McGr. x_ Powex hoc 1380kaaa/topic12/patchnh6qx/ XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing. The cost of a new machine is $340,000 including shipping and installation. The project will increase annual revenues by $400,000 and annual costs by $100,000. The machine will be depreciated via straight-line depreciation for three years to a salvage value of $40,000. If the firm does this project, $30,000 in net working capital will be required, which will be fully recaptured at the end of the project. The estimated salvage value of the machine after the project is $30,000. What is the terminal value of this project if the tax rate is 40%? Round to the nearest penny. Do not include a dollar sign in your answer. You are evaluating a capital project with a Net Investment of $400,000, which includes an increase in net working capital of $16,000. The prolect has a life of 12 years with an expected salvage value of $3,000. The project will be depreciate la simplified straight line depreciation. Revenues are expected to increase by $90,000 per year and operating rahy 58.000 per vear. The firm's marginal tax rate is 40 percent and the cost of

Answer 1

Book Value at the end = $40,000

Estimated Salvage Value (Proceeds) = $30,000

Loss on disposal = $30,000 - $40,000 = $10,000

Tax saving from loss on disposal = $10,000 x 40% = $4,000

After tax proceeds from disposal = $30,000 + $4,000 = $34,000

Working Capital Recouped = $30,000

Terminal value of Project = After tax Proceeds from disposal + working capital recouped

                                        = $34,000 + $30,000

                                        = $64,000