Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year
Question:
Thomson Media is considering some new equipment whose data are shown below. The equipment has a 3-year tax life and would be fully depreciated by the straight-line method over 3 years, but it would have a positive pre-tax salvage value at the end of Year 3, when the project would be closed down. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? WACC 10.0%
Net investment in fixed assets (depreciable basis) $70,000
Required
New working capital .............$10,000
Straight-line depr. rate ............33.333%
Sales revenues, each year ...........$75,000
Operating costs (excl. depr.), each year ....$30,000
Expected pretax salvage value ........$5,000
Tax rate ...................35.0%
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...
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