Question

XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing. The cost of a new machine is $340,000 including shipping and installation. The project will increase annual revenues by $400,000 and annual costs by $100,000. The machine will be depreciated via straight-line depreciation for three years to a salvage value of $40,000. If the firm does this project, $30,000 in net working capital will be required, which will be fully recaptured at the end of the project. The estimated salvage value of the machine after the project is $30,000. What is the terminal value of this project if the tax rate is 40%? Round to the nearest penny. Do not include a dollar sign in your answer.

Answer #1

Depreciation is provided as such that Residual Value at end is $40000. So

Book Value at end of project is $40000

Salvage Value or sale Value of equipment Actual is $30000

Capital loss = 40000-30000= 10000

There will be tax benefit @40% on Capital loss. It will be a Cash inflow 10000*40% = 4000

Calculation of Terminal Value

Salvage Value ...........30000

Less: tax benefit. ......4000

Working Capital

Recovered................30000

_____________________________

Terminal Value..........64000

So Terminal Value of project is $64000

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