Question

Problem 2: Golden State Bakers, Inc. (GSB) has an opportunity to invest in a new dough machine. GSB needs more productive capacity, so the new machine will not replace an existing machine. The new machine is priced at $260,000 and will require modifications costing $15,000. It has an expected useful life of 10 years, will be depreciated using the MACRS method over its 5-year class life, and has an expected salvage value of $12,500 at the end of Year 6. (See Table 13A-2 for MACRS recovery allowance percentages.) The machine will require a $22,500 investment in net working capital. It is expected to generate additional sales revenues of $140,000 per year, but its use also will increase annual cash operating expenses by $65,000. GSB’s required rate of return is 10 percent, and its marginal tax rate is 40 percent.

INPUT DATA:
Base price		$260,000
Modifications		$15,000
Increase in NWC		$22,500
Increase in sales revenue		$140,000
Increase in Operating costs		$65,000
Salvage value		$12,500
Required rate of return		10%
Tax rate		40%
MACRS class life (years)		5
Useful life (years)		6

2. c.(8 points)	Estimnate the net salvage value
Cash flow from sale of asset
Tax effect of sale
Net salvage value cash flow

Answer 1

Net salvage value is given below