Information about a project that ABC Company is considering is as follows: Inves
ID: 2467299 • Letter: I
Question
Information about a project that ABC Company is considering is as follows: Investment $300,000 Revenues $190,000 Variable costs $50,000 Fixed out-of-pocket costs $25,000 Weighted average cost of capital 8% Tax rate 40% The property is considered 5-year property for tax purposes. The company plans to dispose of the property at the end of the third year. Salvage value at that time is expected to be $60,000. Assume all cash flows occur at the end of the year. Refer to the following table. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 20.00% 32.00% 19.20% 11.52% .11.52 5.76% ABC after-tax cash inflow from disposal is:
Explanation / Answer
Year Revenue Variable Cost Fixed cost Depreciatiob rate Depreciation D Income Before Taxes Income Tax 40% Income After Tax I Cash Inflow I+D Discount Factor 8% Discouned cash Inflow 1 $190,000 $50,000 $25,000 20% 60000 $55,000 $22,000.0 $33,000.0 $93,000.0 0.9259 $86,111.11 2 $190,000 $50,000 $25,000 32% 96000 $19,000 $7,600.0 $11,400.0 $107,400.0 0.8573 $92,078.19 3 $190,000 $50,000 $25,000 19.20% 57600 $57,400 $22,960.0 $34,440.0 $92,040.0 0.7938 $73,064.32 4 $190,000 $50,000 $25,000 11.52% 34560 $80,440 $32,176.0 $48,264.0 $82,824.0 0.7350 $60,878.11 5 $190,000 $50,000 $25,000 11.52% 34560 $80,440 $32,176.0 $48,264.0 $82,824.0 0.6806 $56,368.62 5 $60,000 $60,000 0.6806 $40,834.99 6 5.76% 17280 ($17,280) ($17,280) $17,280.0 0.6302 $10,889.33 Total $1,010,000 $250,000 $125,000 $300,000 $275,000 $116,912 $158,088 $535,368 $420,225 Cash Inflow Discounted cash Inflow Ans $535,368 $420,225