Duluth Snow Removal Co. is considering purchasing an $825,000 snow melting machine in order to get...

Duluth Snow Removal Co. is considering purchasing an $825,000 snow melting machine in order to get a contract with the city. They have estimated that the machine would only last four years at which time it would be scrapped for $60,000. It will be depreciated using MACRS and it falls into the 5-year schedule. The 4-year project will generate $480,000 in annual revenue and $95,000 in annual costs. The project will require an investment of $20,000 in net working capital. Duluth Snow is in the 20 percent tax bracket and requires a 10 percent return on projects. What is the project NPV? (Round answer to nearest whole number)

Expert Solution

Book value of asset after 4 years = (1 - 0.20-0.32-0.192-0.1152) = 17.28%

Book value = 825,000 * 17.28% = 142,560

sale value = 60,000

Loss = sale value - book value

= 60,000 - 142,560

= 82560

tax savings on account of loss = 82560*20% = 16512

after tax sale value = 60,000+16,512 = $76,512

formulas will be as follows:

jeff jeffy answered 2 years ago

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