Compute the after tax salvage value of the equipment

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Reference no: EM131956430

Your firm is considering a new product development. An outlay of $110,000 is required for equipment, and additional net working capital of $5,000 is required. Implementing the project will generte a time zero investment tax credit benefit of $3,000 for the firm (i.e. at the beginning of the project). The project is expected to have a 4 year life, and the equipment will be depreciated on a straight line basis to a $10,000 book value. Producing the new product will reduce current manufacturing expenses by $20,000 annually and increase earnings (revenue) before depreciation and taxes by $23,000 annually. Stanton's marginal tax rate is 40%. Stanton expects the equipment will have a market salvage value of $15,000 at the end of 4 years.

1. Compute the after tax salvage value of the equipment at the end of 4 years.

2. Compute the total cash flows associated with the analysis of this project and clearly indicate them on a timeline.

3. If the cost of capital fora project at this risk is 9%, what is the project's NPV? Should it be accepted? Accepted or reject the project? Why?

Reference no: EM131956430

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