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In: Finance

Paccione Paving is considering purchasing a unique piece of equipment for a road construction project that...

Paccione Paving is considering purchasing a unique piece of equipment for a road construction project that will last five years. At the end of the five-year project, Paccione will no longer need the equipment. The equipment will cost $1,225,000, will be depreciated straight-line over seven years, and will be sold for $415,000 at the end of the project. The project will generate additional revenues of $750,000 with annual expenses of $165,000. The project will require an initial investment in net working capital of $85,000. Paccione is in the 20 percent tax bracket and requires a 16 percent return on projects. What is the project NPV? (Round answer to the nearest whole number)

Solutions

Expert Solution

Cost of the Equipment = $1,225,000

The cost is to be depreciated over 7 years.

hence depreciation cost per year = $1,225,000 / 7 = $175000.

Depreciation Schedule-

Year Opening book value Depreciation Closing book value
1 1,225,000 175,000 1,050,000
2 1,050,000 175,000 875,000
3 875,000 175,000 700,000
4 700,000 175,000 525,000
5 525,000 175,000 350,000
6 350,000 175,000 175,000
7 175,000 175,000 0

Book value of the Equipment at the end of 5 year = $350000

Sale value = $415,000

Gain on sale of of equipment = $415,000-$350,000 = $65000

Tax on gain on sale = $65000*20% = $13000

After tax net proceeds from sale of equipment = $415000-$13000 = $402,000


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