Question

Use the following information for the problem.

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      Year                MACRS Depreciation Allowances for 3-year Property Class

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1 33.33%
2 44.44%
3 14.82%
4 7.41%
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Your company just bought a new distillation unit for $100,000. Such equipment has a 3-year MACRS classification.
a) What is the book value of the distillation unit at the end of year 3? Use the $100,000 cost of the unit and the MACRS table above to find the book value.
b) If the distillation unit will be sold in 3 years for $60,000, what is the after-tax cash flow (i.e., after-tax salvage value) from the sale? The tax rate is 25 percent.
c) The distillation unit is used in a project that has a three-year life. The project is expected to generate the following operating cash flows. The initial investment required for the project consists only of the cost of purchasing the distillation unit. It does not require net working capital. It has no other cash flows besides the operating cash flows and the cash flow from selling the equipment at the end of the project in (b). If the required rate of return on the project is 15 percent, what is the net present value of the project? Should it be accepted? Why?

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                       Year                Operating cash flow (OCF)

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                           1                               $40,000
                           2                               50,000
                           3                               70,000

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Answer 1