Question

Calculating Salvage Value An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,100,000 and will be sold for $1,400,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset?

Answer 1

1-	Year	cost of machine
	1	7100000	20%	1420000
	2	7100000	32%	2272000
	3	7100000	19.20%	1363200
	4	7100000	11.52%	817920
	Accumulated depreciation			5873120
	Book value of machine at the time of sale	7100000-5873120	1226880
	selling price of machine			1400000
	Book value of machine at the time of sale			1226880
	gain on sale of machine			173120
	tax on gain on sale of machine	173120*35%		60592
	after tax salvage value	1400000-60592		1339408
2-	Year	0	1	2	3	4	5
	cost of machine	-360000
	recovery of working capital	80000
	savings from annual salaries		105000	105000	105000	105000	105000
	less depreciation =(360000)/5		72000	72000	72000	72000	72000
	before tax cash flow =		33000	33000	33000	33000	33000
	less tax 34%		11220	11220	11220	11220	11220
	after tax profit		21780	21780	21780	21780	21780
	add depreciation		72000	72000	72000	72000	72000
	operating after tax profit		93780	93780	93780	93780	93780
	add after tax salvage value (60000)*(1-tax rate)						39600
	less investment in working capital						-80000
	net operating cash flow	-280000	93780	93780	93780	93780	53380
	present value of cash flow = cash flow/(1+r)^n r = 12%	-280000	83732.14	74760.84	66750.7516	59598.88539	30289.25
	Net present value = sum of present value of cash flow	35131.87
	Yes it is worthwhile to purchase the computer as NPV is greater than zero