A company is considering an 8-year project to expand into a new geographical are

Question

A company is considering an 8-year project to expand into a new geographical area. The project requires a new machine, which would cost $200,000 FOB San Francisco, with a shipping cost of $5,000 to the new plant location. Installation expenses of $10,000 would also be required. This new machine would be classified as 7-year property for MACRS depreciation purposes. The project engineers anticipate that this equipment could be sold for salvage for $47,000 at the end of the project. If the corporate tax rate is 32%, what is the after tax salvage cash flow for this new machine at the end of the project? (Answer to the nearest dollar.)

MACRS percentages for depreciation each year are as follows:

Explanation / Answer

The after tax salvage cash flow for this new machine at the end of the project will be 68% of the salvage value of the equipment less depreciation for year 8

Depreciation for year 8 is 4.45% of $ 215,000 (Total Cost of the Equipment) = $ 9,567.50

Thus, the cash flow on termination and sale of the equipment will be 68% of ($ 47,000 - $ 9,567.50) = $ 25,454.10.

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