The Carpet store is upgrading their warhous machinery. The company falls in the

Question

The Carpet store is upgrading their warhous machinery. The company falls in the 40% tax bracket, the old equipment has a salvage of 84000, and a book value of 66000. what is the after tax salvage value?

a. 7200

b. 20000

c. 72,240

d. 76800

e. 84000

____________________________________________________

Given the 2 cash flows for these mutually exclusive projects, along with a required return of 10% for each project, determine the crossover rate?

period Project A /PROJECT B

0 -500/ -400

1 325/ 325

2 325/ 200

______________________________

A.13.75%

B. 11.80%

C. 19.43%

D. 10.00%

E. 22.17%

Explanation / Answer

a) Salvage Value                             84,000.00 Book Value                             66,000.00 Gain                             18,000.00 Tax on Gain @40%(18000*40%)                                7,200.00 Salvage Value Net of Tax(84,000-7,200)                             76,800.00 b) CF1/(1+r) +CF2/(1+r)^2 - A = CF1/(1+r) +CF2/(1+r)^2 - B 325/(1+r) + 325/(1+r)^2 - 500 = 325/(1+r) +200/(1+r)^2 - 400 325/(1+r)^2 - 500 =200/(1+r)^2 - 400 325/(1+r)^2 - 200/(1+r)^2 = 500- 400 325/(1+r)^2 - 200/(1+r)^2 =100 125/(1+r)^2=100 r=11.8% Cross Over rate is 11.8%

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