Question

For your convenience - the information on Project Y is repeated here. Reminder - show your work! Project Y involves a new type of machine used in manufacturing automobile dashboard frames. Your manager expects to sell 5,000 units per year at a price of $300 per unit. Variable cost will run at $150 per unit. Fixed costs for the project will run at $300,000 per year. This project will have a 3 year life. The machine will cost $1,000,000 and will be depreciated using 5-year MACRS. After 3 years, the machine will be worth $400,000. The MACRS rates are as follows: yr 1.20; yr 2.32; yr 3.192; yr 4.1152; yr 5.1152; yr 6.0576 Net working capital will increase initially by $100,000. The tax rate is 20% and the cost of capital is 16%. Calculate the net proceeds from the sale of the machine at the end of year 3.

Answer 1

Written down value of machine at the end of year 3 = Cost – Accumulated Depreciation

= 1,000,000*(1-0.20-0.32-0.192)

= $288,000

Selling price = $400,000

Gain on Sale = $112,000

Tax on gain = 112,000*20% = $22,400

Net proceeds from sale of machine = Selling price – tax

= 400,000-22400

= $377,600