### Depreciation and After-Tax Salvage Value Calculation#### Problem Statement:A nine-year project involves equipment costing $2,320,000 that will be depreciated using the five-year MACRS schedule. If the estimated pre-tax salvage value for the equipment at the end of the project's life is $417,600, what is the after-tax salvage value for the equipment? Assume a marginal tax rate of 21 percent.#### Answer Choices:- $329,904- $399,184- -$64,896- $505,296#### Detailed Explanation:This problem requires calculating the after-tax salvage value of equipment by considering the depreciation and the marginal tax rate. The steps involve:1. **Depreciation Calculation:** Use the appropriate depreciation schedule for the equipment. For a five-year MACRS (Modified Accelerated Cost Recovery System) schedule, the depreciation percentages for each year are as follows: | Year | Percentage | |------|-------------| | 1 | 20% | | 2 | 32% | | 3 | 19.2% | | 4 | 11.52% | | 5 | 11.52% | | 6 | 5.76% |2. **Calculate Accumulated Depreciation:** Sum of depreciation percentages over the five years: \[ 20\% + 32\% + 19.2\% + 11.52\% + 11.52\% + 5.76\% = 100\% \]3. **Book Value at the End of Project Life:** After full depreciation, the book value is zero since accumulated depreciation equals 100% of the asset cost.4. **Calculate Gain or Loss on Sale:** The salvage value ($417,600) minus the book value (0) equals the gain on sale which is $417,600.5. **Tax Impact:** Calculate taxes on the gain. \[ \text{Tax} = \text{Gain} \times \text{Tax Rate} = 417,600 \times 0.21 = 87,696 \]6. **After-Tax Salvage Value:** Subtract the tax from the pre-tax salvage

1. After tax salvage value of the equipment = Pre-tax salvage value - Tax expenses on sale of…

A nine year project involves equipment costing $2,320,000 that will be depreciated using the five-year MACRS schedule. If the estimated pre-tax salvage value for the equipment at the end of the project's life is $417,600, what is the after-tax salvage value for the equipment? Assume a marginal tax rate of 21 percent. O $329,904 O $399.184 O-$6,496 O $505,296

A nine year project involves equipment costing $2,320,000 that will be depreciated using the five-year MACRS schedule. If the estimated pre-tax salvage value for the equipment at the end of the project's life is $417,600, what is the after-tax salvage value for the equipment? Assume a marginal tax rate of 21 percent. O $329,904 O $399.184 O-$6,496 O $505,296

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $1.95 million and be depreciated usi$882,038 $991,492 $854,426 $750,550 $1,103,426ng straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15 percent of its initial cost. The company believes that it can sell 30,500 tents per year at a price of $78 and variable costs of $37 per tent. The fixed costs will be $535,000 per year. The project will require an initial investment in net working capital of $249,000 that will be recovered at the end of the project. The required rate of return is 12.1 percent and the tax rate is 21 percent. What is the NPV? A. $882,038 B. $991,492 C. $854,426 D. $750,550 E. $1,103,426
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onsider the following financial informationabout a retooling project at a computer manufacturing company:• The project costs $2.5 million and has a five-yearservice life.• The retooling project can be classified as sevenyear property under the MACRS rule.• At the end of the fifth year, any assets held for theproject will be sold. The expected salvage valuewill be about 10% of the initial project cost.• The firm will finance 40% of the project moneyfrom an outside financial institution at an interestrate of 10%. The firm is required to repay the loanwith five equal annual payments.• The firm’s incremental (marginal) tax rate on theinvestment is 35%.• The firm’s MARR is 18%.With the preceding financial information,(a) Determine the after-tax cash flows.(b) Compute the annual equivalent worth for thisproject.
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