Beautifully Fabulous Beauty Salon manufactures two products, Beauty Gloss and Cocooning Spray. Beauty Gloss is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Cocooning Spray. Beauty Gloss is produced on an automated production line. Due to the forecast of economic growth, the BFBS is considering purchasing a new machine costing $40,000. The machine will have 10 years of useful life and a salvage value of $6,000. Using the straight-line depreciation method, the original machine cost will be depreciated over 10 years not considering the salvage value in the calculation of the depreciation. The new machine will generate $15,000 in annual net cash flows throughout its useful life (ordinary annuity). To maintain the machine it will require additional working capital of $3,000, which would be released at the end of the useful life. The company's tax rate is 40% and its discount rate is 10%.

Can someone explain where the $4002 came from for salvage value? Also, shouldn't the depreciation be a loss not a gain?

Descriptio n PV of After Tax Cash Flows Year(s) Cash Flow New machine cost Now ($40,000.00) ($40,000.00) 1 ($40,000.00) Working capital Now ($3,000.00) ($3,000.00) 1 ($3,000.00) New annual cost savings 1 to 10 $15,000.00 60% $9,000.00 6.14457 $55,301.13 Depreciati on tax shield 1 to 10 $4,000.00 40% $1,600.00 6.14457 $9,831.31 Salvage value of machine 10 $6,000.00 $6,000.00 0.38554 $4,002.00 Release working capital 10 $3,000.00 $3,000.00 0.38554 $1,156.62 Net present value 40% After Tax Cash Factor @ Flows 10% $27,291.06