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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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