Question
Problem 2: Golden State Bakers, Inc. (GSB) has an opportunity to invest in a new dough machine. GSB needs more productive capacity, so the new
Problem 2: Golden State Bakers, Inc. (GSB) has an opportunity to invest in a new dough machine. GSB needs more productive capacity, so the new machine will not replace an existing machine. The new machine is priced at $260,000 and will require modifications costing $15,000. It has an expected useful life of 10 years, will be depreciated using the MACRS method over its 5-year class life, and has an expected salvage value of $12,500 at the end of Year 6. (See Table 13A-2 for MACRS recovery allowance percentages.) The machine will require a $22,500 investment in net working capital. It is expected to generate additional sales revenues of $140,000 per year, but its use also will increase annual cash operating expenses by $65,000. GSBs required rate of return is 10 percent, and its marginal tax rate is 40 percent.
INPUT DATA: | ||||
Base price | $260,000 | |||
Modifications | $15,000 | |||
Increase in NWC | $22,500 | |||
Increase in sales revenue | $140,000 | |||
Increase in Operating costs | $65,000 | |||
Salvage value | $12,500 | |||
Required rate of return | 10% | |||
Tax rate | 40% | |||
MACRS class life (years) | 5 | |||
Useful life (years) | 6 | |||
2. c.(8 points) | Estimnate the net salvage value | |
Cash flow from sale of asset | ||
Tax effect of sale | ||
Net salvage value cash flow |
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