The president of Lowell Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $60,000, and it falls into the MACRS 3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4). Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 4 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. What is the total value of the terminal year non-operating cash flows (after-tax salvage value + working capital recovered) at the end of Year 4?
| a. |
$17,000 |
|
| b. |
$18,680 |
|
| c. |
$21,000 |
|
| d. |
$25,000 |
|
| e. |
$27,000 |
Please provide rating.....
| Post tax salvage value for asset = (Sale price - Depreciable value at the end of 4th year)*(1-Tax rate) | |||||||||
| Sales price = | 25000 | ||||||||
| Depreciable value= | 0 | ||||||||
| Tax rate = | 40% | ||||||||
| Post tax salvage value = | =25000*(1-40%) | ||||||||
| Post tax salvage value = | 15000 | ||||||||
| Recovery of working capital = | 2000 | ||||||||
| Therefore non operating terminal year cash flow = 15000+2000 =17000 | |||||||||
| Correct answer is option a. | 17000 | ||||||||
The president of Lowell Inc. has asked you to evaluate the proposed acquisition of a new...
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