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You just finished a capital investment analysis on a $100 million project that has a 5-year...

You just finished a capital investment analysis on a $100 million project that has a 5-year life. The resulting NPV is $3 million using a 12% required return and a 35% marginal tax rate. You assumed a $16 million salvage value, $10 million above its adjusted tax basis. How much could the salvage value decline before the NPV equals zero?

The answer should be: $8,133,885

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Answer #1

Fist we need to calculate the sum of the PV of the annual CFs

We are told that 16million salvage value is 10 million above the tax adjusted basis so the the profit is 10 million and the tax on this is an outflow which needs to be adjusted to the salvage value.

Tax basis is 6

Using the sum of the annual OCF, we can calculate the new salvage value

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