Question

Project cash flow and NPV.  The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds​ (1957 replicas). The necessary foundry equipment will cost a total of $4,100,000 and will be depreciated using a​ five-year MACRS​ life. The sales manager has an estimate for the sale of the classic Thunderbirds. The annual sales volume will be as​ follows:

Year​ one: 230		Year​ four: 370
Year​ two: 290		Year​ five: 300
Year​ three: 360

If the sales price is $30,000 per​ car, variable costs are $18,000 per​ car, and fixed costs are $1,100,000 ​annually, what is the annual operating cash flow if the tax rate is 30​%? The equipment is sold for salvage for ​$500,000 at the end of year five. Net working capital increases by $600,000 at the beginning of the project​ (year 0) and is reduced back to its original level in the final year. Find the internal rate of return for the project using the incremental cash flows.

Answer 1

Tax on gain on sale of asset = (Sale Price - [Cost - Accumulated Depreciation]) * 0.30

Tax on gain on sale of asset = (4100000 - [4100000 - 3863840]) * 0.30

Tax on gain on sale of asset = 263840 * 0.30

Tax on gain on sale of asset = $79152