Suppose an asset has a first cost of $8,000. a life of five years, a salvage value

Question:

Suppose an asset has a first cost of $8,000. a life of five years, a of $2,000 at the end of five years, and a net annual before-tax revenue of $2,500. The firm's marginal tax rate is 35.The asset will be depreciated by three-year MACRS.
(a) Using the generalized cash flow approach, determine the cash flow after taxes.
(b) Rework part (a), assuming that the entire investment would be financed by a bank loan at an interest rate of 9%.
(c) Given a choice between the financing methods of parts (a) and (b), show calculations to justify your choice of which is the better one at an interest rate of 9%. Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...