Question

A company is considering a 3-year project that requires paying $5,000,000 for a cutting-edge production equipment. This equipment falls into the 5-year MACRS class and will have a market value of half its original purchase price after 2 years. The project requires an initial investment in net working capital of $350,000. The project is estimated to generate $1,200,000 in annual operating cash flows. The company faces a 40% tax rate. The required rate of return on projects like this one is 10 percent. The After-Tax Salvage Value of the production equipment at the end of the 3rd year equals: (a) $2,460,000 (b) $2,076,000 (c) $1,944,600 (d) $1,710,000 (e) $1,326,000

Answer 1

First we have to compute the book value at the end of 3th year
Remaining book value =		1440000
5000000*(1-20%-32%-19.2%)
Book value =		1440000
sales price is =	2500000
book value =	1,440,000
Gain on sales=	1,060,000
Tax on gain =@40%	424,000.00
After tax cash flow from sale=	2,076,000
ans = option b)	2,076,000