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 |
Answer is $18,680
Initial Investment = $60,000
Useful Life = 3 years
Depreciation Year 1 = 33% * $60,000
Depreciation Year 1 = $19,800
Depreciation Year 2 = 45% * $60,000
Depreciation Year 2 = $27,000
Depreciation Year 3 = 15% * $60,000
Depreciation Year 3 = $9,000
Book Value at the end of Year 3 = $60,000 - $19,800 - $27,000 -
$9,000
Book Value at the end of Year 3 = $4,200
After-tax Salvage Value = Salvage Value - (Salvage Value - Book
Value) * tax rate
After-tax Salvage Value = $25,000 - ($25,000 - $4,200) * 0.40
After-tax Salvage Value = $16,680
Initial Investment in NWC = $2,000
Year 3:
Non-Operating Cash Flows = NWC recovered + After-tax Salvage
Value
Non-Operating Cash Flows = $2,000 + $16,680
Non-Operating Cash Flows = $18,680
The president of Lowell Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price...
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...
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