Question Details

What is the equipment- after-tax salvage value for use in a capital budgeting 


1.	A company is considering a proposed new plant that would increase productive capacity.  Which of the following statements is CORRECT?

a.	In calculating the project's operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC.  If interest were deducted when estimating cash flows, this would, in effect,  “double count” it.
b.	Since depreciation is a non-cash expense, the firm does not need to deal with depreciation when calculating the operating cash flows.
c.	When estimating the project- operating cash flows, it is important to include both opportunity costs and sunk costs, but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process.
d.	Capital budgeting decisions should be based on before-tax cash flows.
e.	The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.

2.	Fool Proof Software is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.  Revenues and other operating costs are expected to be constant over the project's 10-year expected life.  What is the Year 1 cash flow?

Equipment cost (depreciable basis)	$65,000
Sales revenues, each year	$60,000
Operating costs (excl. deprec.)	$25,000
Tax rate	35.0%

a.	$30,258
b.	$31,770
c.	$33,359
d.	$35,027
e.	$36,778

3.	Temple Corp. is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value.  No new working capital would be required.  Revenues and other operating costs are expected to be constant over the project's 3-year life.  What is the project's NPV?

Risk-adjusted WACC	10.0%
Net investment cost (depreciable basis)	$65,000
Straight-line deprec. rate	33.3333%
Sales revenues, each year	$65,500
Operating costs (excl. deprec.), each year	$25,000
Tax rate	35.0%

a.	$15,740
b.	$16,569
c.	$17,441
d.	$18,359
e.	$19,325

4.	Liberty Services is now at the end of the final year of a project .  The equipment originally cost $22,500, of which 75% has been depreciated.  The firm can sell the used equipment today for $6,000, and its tax rate is 40%.  What is the equipment- after-tax salvage value for use in a capital budgeting analysis?  Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

a.	$5,558
b.	$5,850
c.	$6,143
d.	$6,450
e.	$6,772
5.	Your company, CSUS Inc., is considering a new project whose data are shown below.  The required equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.  Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life.  What is the project's Year 4 cash flow?

Equipment cost (depreciable basis)	$70,000
Sales revenues, each year	$42,500
Operating costs (excl. deprec.)	$25,000
Tax rate	35.0%

a.	$11,814
b.	$12,436
c.	$13,090
d.	$13,745
e. $14,432




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