Question

Your firm intends to purchase equipment today for $1 million (year 0). The equipment will be straight-line depreciated to a book value of $0 over 10 years (years 1-10). The project will last five years, generating revenues of $600,000 per year (years 1-5). Variable costs will equal a constant 30% of revenues. Fixed costs will equal $100,000 per year (years 1-5). Working capital equals 20% of next year's revenues. The equipment will be sold for $600,000 in year 6. The appropriate tax rate is 40% and the discount rate is 10%. What is the NPV of this project? Be sure to clearly state the relevant CFs each year between year 0 and year 6.

How do you figure out the Cash Flow Salvage value?

Answer 1

Asset cost	$                                      1,000,000
Less: Depreciation charged	$                                          600,000	=1000000*6/10
Book value	$                                          400,000
Sale value of machine	$                                          600,000
Profit/(Loss) on sale	$                                          200,000
Less: Tax payable@40%	$                                            80,000
After tax sale value	$          520,000