Use the following information to answer the next three questions: Some new equip
ID: 2731213 • Letter: U
Question
Use the following information to answer the next three questions: Some new equipment under consideration will cost $2,400,000 and will be used for 7 years. Net working capital will experience a one time increase of $521,000 if the equipment is purchased. The equipment is expected to generate annual revenues of $2,200,000 and annual costs of $704,000. The project falls under the five-year MACRs class for tax purposes, the tax rate is 36 percent, and the cost of capital is 15 percent. The project's fixed assets can be sold for $576,000 at the end of the project's life. -What is the book value of the equipment at the end of the project's life? Round your answer to the nearest whole dollar. -What are the taxes on the sale of the equipment at the end of the project's life? Be sure to indicate clearly if taxes are owed or if there is a tax benefit. Round your answer to the nearest whole dollar. -What is the net cash flow for the last year of the project? Round your answer to the nearest whole dollar.
MACRS Depreciation Allowances Property Class Year 3-Year 5-Year 7-Year 1 33.33% 20.00% 14.29% 2 44.45 32.00 24.49 3 14.81 19.20 17.49 4 7.41 11.52 12.49 5 11.52 8.93 6 5.76 8.92 7 8.93 8 4.46Explanation / Answer
1)
Book value at the of project life = Asset cost-Depreciation charged
= $2,400,000-$2,400,000×(20%+32%+19.20%+11.52%+11.52%+5.76%+0%)
= $0
2)
Taxes on sale:
= Profit on sale×Tax rate
= $576,000×36%
= $207,360
3)
Net cash flows:
= $889,640+$957,440
= $1,847,080
Sales $ 2,200,000 Less: Costs $ 704,000 Dereciation $ - EBIT $ 1,496,000 Less: Tax @36% $ 538,560 Net income $ 957,440 Add: Depreciation $ - Operating cash flows (OCF) $ 957,440