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In: Finance

38) You are evaluating a potential investment in equipment. The equipment's basic price is $138,000, and...

38) You are evaluating a potential investment in equipment. The equipment's basic price is $138,000, and shipping costs will be $4,100. It will cost another $20,700 to modify it for special use by your firm, and an additional $6,900 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 22,100 at the end of three years. The equipment is expected to generate revenues of $131,000 per year with annual operating costs of $67,000. The firm's marginal tax rate is 25.0%. What is the value of the after-tax cash flow associated with the sale of the equipment?

$16,575
$19,545
$10,221
$7,666
$9,324

Solutions

Expert Solution

$19,545

Working:

Step-1:Calculation of cost of machine
Basic Price $       1,38,000
Shipping costs $             4,100
Modification cost $           20,700
Installation costs $             6,900
Total costs of equipment $       1,69,700
Stepp-2:Calculation of book value of equipment at the end of year 3
Year Costs Depreciation rate Depreciation expense Accumulated Depreciation expense Ending Book Value
1 $ 1,69,700 33% $           56,001 $     56,001 $ 1,13,699
2 $ 1,69,700 45% $           76,365 $ 1,32,366 $     37,334
3 $ 1,69,700 15% $           25,455 $ 1,57,821 $     11,879
Step-3:Calculation of after tax sale price of equipment
Sale price of equipment a $           22,100
Book Value at the time of sale b $           11,879
Profit on sale c=a-b $           10,221
Tax on profit d=c*25% $             2,555
After tax cash flow e=a-d $           19,545

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