Question

A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000 when the project ends. Operating expenses are expected to be $75,000 in the first year and are expected to increase 3% per year over the life of the project. The appropriate discount rate is 8%, the company’s tax rate is 20%, and the CCA rate is 30%. What amount would you use for salvage value in your NPV calculation? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.)

Answer 1

Statement showing Book value of machine at end of 5 years

Year	Opening balance	Depreciation Rates	Depreciation (opening balance x Depreciation rates)	Closing Balance
1	300000	15%	45000	255000
2	255000	30%	76500	178500
3	178500	30%	53550	124950
4	124950	30%	37485	87465
5	87465	30%	26239.50	61225.50

Thus book value at end of year 5 = 61226$

Statement showing cash inflow from sale of equipment

Particulars	Amount
Selling price of equipment at end of year 5	50000.00
Book value at end of year 5	61225.50
Loss on sale of equipment	11225.50
Tax shield @ 20%	2245.10
Total cash inflow on sale of equipment (50000+2245)	52245.10

Thus $52245.10 would be taken as salvage value in year 5 in NPV calculation