Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Could you please explain how to figure this out? Thank you very much! Problem: Suppose you have just completed a capital expenditure analysis on the

image text in transcribed

Could you please explain how to figure this out? Thank you very much!

Problem: Suppose you have just completed a capital expenditure analysis on the following proposal Your company is considering the purchase of a fleet of energy-efficient delivery trucks. The trucks will reduce annual expenses by $325,000. The trucks will require a total initial investment of $1 million Their useful life is five years, at which time they will be sold for 10% of original cost For tax purposes, the trucks will be depreciated using MACRS and are classified as 5-year property The investment will have no effect on net working capital The cost of capital is 14% and the marginal tax rate is 35%. . Below is your cash flow analysis showing a NPV of $7,223. However, your CFO is concerned about the salvage value assumption and asks you this question: "How much could the $100,000 salvage value decline before the NPV goes to zero?" 2 4 Savings Depreciation EBIT Tax @ 35% Depreciation OCF Investment ANWC Salvage Tax on Salvage Free Cash Flow NPV @ 14% MACRS% NBV (Tax Basis) 325,000 325,000 325,000 325,000 325,000 200,000 (320,000) (192,000) (115,200 (115,200 5,000 133,000209,800 209,800 (43,750) (1,750) (46,550) (73,430) (73,430) 200,000 320,000 192,000 115,200 115,200 281,250 323,250 278,450 251,570 251,570 125,000 (1,000,000) 0 100,000 14,840 336,730 (1,000,000) 281,250323,250278,450 251,570 7,223 20.00% 32.00% 19.20% 11.52% 11.52% 800,000 480,000 288,000 172,800 57,600

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Geert Bekaert, Robert J. Hodrick

1st Edition

0131163604, 9780131163607

More Books

Students also viewed these Finance questions