35) Stanley Company has obtained the following information about a proposed project:

Annual cash operating savings (excluding depreciation)

for 5 years (end of year)$50,000

Depreciation expense per year for tax purposes$33,000

Estimated salvage value in 5 years$10,000

Cost of equipment$175,000

Required rate of return10%

Income tax rate40%

Estimated useful life (in years)5

Depreciation method for tax purposes Straight-line

Present value of ordinary annuity of one

at 10% for 5 periods 3.7908

Present value of one at 10% for 5 periods 0.6209

Required:

A) What is the NPV of the project?

B) Should the project be undertaken?

36) Jesse Company has obtained the following data about a possible planned investment:

Cost $300,000

Terminal salvage value in 10 years0

Annual cash operating savings excluding depreciation

for 10 years (end of year) $50,000

Estimated useful life in years10

Minimum desired rate of return10%

Present value of ordinary annuity, 10%, 10 periods6.1446

Present value of one, 10%, 10 periods 0.3855

Income tax rate40%

The company uses the straight-line depreciation method for taxes.

Required:

A) Compute the net present value of the investment.

B) Compute the net present value of the investment if the terminal salvage value is estimated to be $50,000 in 10 years.

11.6   Questions

1) A five-year MACRS asset that cost $50,000 was sold at the end of its useful life for $20,000. The book value of the asset at the time of sale was $0. The asset had no expected terminal value. The tax rate is 20%. What is the net after-tax cash effect from the sale of the asset?

A) $16,000 cash inflow

B) $16,000 cash outflow

C) $24,000 cash inflow

D) $24,000 cash outflow

2) A plant asset with a book value of $40,000 is sold for $10,000. The applicable tax rate is 20%. The net after-tax cash effect of the sale is a ________.

A) $6,000 cash inflow

B) $10,000 cash inflow

C) $16,000 cash inflow

D) $16,000 cash outflow

3) A plant asset with a book value of $50,000 is sold for $40,000. The applicable tax rate is 50%. What is the tax effect of the loss on sale?

A) $5,000 cash outflow

B) $5,000 cash inflow

C) $20,000 cash inflow

D) $25,000 cash inflow

4) A plant asset with a book value of $320,000 is sold for $560,000. The tax rate is 20%. What is the net after-tax cash inflow resulting from this sale?

A) $144,000

B) $512,000

C) $560,000

D) $656,000

5) A plant asset with a book value of $320,000 is sold for $400,000. The tax rate is 20%. What is the tax effect of the gain on sale?

A) $16,000 cash outflow

B) $16,000 cash inflow

C) $64,000 cash inflow

D) $80,000 cash inflow

6) A plant asset with a book value of $160,000 is sold for $100,000. The applicable tax rate is 20%. What is the net after-tax cash inflow resulting from the sale?

A) $12,000 cash inflow

B) $88,000 cash inflow

C) $100,000 cash inflow

D) $112,000 cash inflow