Question

The DoNotMissSnow Company is evaluating an asset that may increase sales by $120,000 every year for 4 years. There is no expected change in net operating working capital. The company's cost of capital is 6%. The proposed asset costs $400,000, will require $20,000 to modify for operations, and falls in the 3-year class MACRS for depreciation rates: .33, .45, .15, and .07 for years 1 through 4, respectively. At the end of the 4 years, it is expected that the asset may sell for $30,000. The company's tax rate is 21%. SHOW ALL WORK FOR FULL CREDIT. a) (2 pts) What is the initial outlay for this project? b) (8 pts) What are the operating cash flows in Years 1 through 4? c) (2 pts) As part of the terminal cash flow in Year 4, what is the after-tax salvage value of the asset? d) (4 pts) What is the net present value of this proposed asset investment? Should it be accepted or rejected? SHOW ALL WORK ON THE TI BAII Plus Calculator.

Answer 1

Part a) Initial outlay is $400,000 + $20,000 = $420,000

Part b)

Depreciable value = $420,000 - 30,000 = $390,000

Depreciation for 1 year = $128,700

Derpeciation for 2 year = $175,500

Depreciation for 3 year = $58,500

Depreciation for 4 year = $27,300

Operating cash flows for

Year 1 = $120,000 - taxes (which would be zero since depeciation is more than sales)

Year 2 = $120,000 - taxes (which would be zero since depeciation is more than sales)

Year 3 = $120,000 - taxes (120,000 - 58,500 = 61,500 * 21% = $12,915) = $107,085

Year 4 = $120,000 - taxes (120,000 - 27,300 = 92,700 * 21% = $19,467) = $100,533 + Salvage value of $30,000

= $130,533

NPV = -$420,000 + $413,312 = -$6,688

I don't have BAII calculator.