Question

23- Celsius Corp. is conducting a capital budgeting analysis to decide whether to invest in a new project which has an expected life of 5 years. The following information is available:

• The installed cost of the new equipment is $360,000. Installation will cost an additional $40,000 The equipment will be depreciated using 5-year MACRS depreciation over the 5-year life of the project.

• An initial NOWC investment equal to 10 percent of year 1 sales will also be required.

• The equipment is expected to have a salvage value of $80,000 at the end of the project's life.

• Forecasted sales in year 1 is $600,000 with a gross margin (excluding depreciation) of 40%. Sales is expected to increase 5% per year over the 5-year life of the project.

• Additional NOWC investments equal to 10 percent of the expected increase in sales will also be required each year.

• Interest expense from a loan used to finance the project will result in annual interest payments of $28,000 each year over the 5-year life of the project.

• Celsius has a 21% corporate tax rate.

What are the after-tax net proceeds from the sale of the equipment in year 5? (Round to the nearest dollar)

Select one:

a. $0

b. $11,962

c. $63,200

d. $68,038

e. $80,000

Answer 1

	Depreciation Schedule: MACRS Method
	Year	Rate	Depreciation	Accumulated Depreciation	Book Value
	0		$0.00	$0.00	$400,000.00
	1	20.00%	$80,000	$80,000	$320,000
	2	32.00%	$128,000	$208,000	$192,000
	3	19.20%	$76,800	$284,800	$115,200
	4	11.52%	$46,080	$330,880	$69,120
	5	11.52%	$46,080	$376,960	$23,040
i	Therefore book value at the end of 5th year =	23,040
ii	Salvage value =			80,000
iii=ii-i	Gain on sale =			56,960
iv=iii*21%	tax on gain @ 21%			11,962
v=ii-iv	Post tax salvage value		68,038
	Therefore answer is option d.		68,038