Question
10.Calculating Salvage ValueAn asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of
10.Calculating Salvage ValueAn asset used in a 4-year project falls in the 5-year MACRS class for tax purposes. The asset has an acquisition cost of $7.6 million and will be sold for $1.4 million at the end of the project. If the tax rate is 21 percent, what is the aftertax salvage value of the asset?
11.Calculating NPVThurston Petroleum is considering a new project that complements its existing business. The machine required for the project costs $4.1 million. The marketing department predicts that sales related to the project will be $2.35 million per year for the next four years, after which the market will cease to exist. The machine will be depreciated to zero over its 4-year economic life using the straight-line method. Cost of goods sold and operating expenses related to the project are predicted to be 25 percent of sales. The company also needs to add net working capital of $150,000 immediately. The additional net working capital will be recovered in full at the end of the projects life. The corporate tax rate is 25 percent and the required return for the project is 13 percent. Should the company proceed with the project?
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