Company uses straight-line to zero depreciation

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Reference no: EM131904004

1. Edward's Manufactured Homes plans to purchase some machinery for its new project. The purchase price is $325,000. The expected life of the new project is 5 years. After 5 years, the equipment can be sold for $50,000. The company uses straight-line to zero depreciation. What is the aftertax salvage value of the equipment at year 5 if the tax rate is 30 percent?

A. $35,000

B. $50,000

C. 15,000

D. $325,000

2. Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not?

No; The NPV is -$172,937.49

Yes; The NPV is $466,940.57

No; The NPV is -$87,820.48

Yes; The NPV is $251,860.34

Reference no: EM131904004

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