Management expects the salvage value of the machine

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Reference no: EM132028743

1. A capital investment project has an initial depreciable basis of $100,000. Management expects the salvage value of the machine at the end of 4 years to be $10,000. The firm’s accountant (who assumed a zero salvage value for bookkeeping purposes) is depreciating the machine using the MACRS rates BELOW:

Year 1 33%

Year 2 45%

Year 3 15%

Year 4 7%

The firm’s marginal tax rate is expected to be 20%. Management expects that working capital (inventory, receivables, etc.) needs will immediately rise by $30,000 and increase by $1,000 each year through year three. At the end of the project’s life the working capital investment, in all years prior to the last year, will be recovered. This project is similar in risk to the firm’s existing projects and the required return on this risk project is 8% after tax.

The after-tax salvage value is:

a. $30,000

b. $700

c. $800

d. $4,000

e. $8,000

Reference no: EM132028743

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