What is after-tax salvage value

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Reference no: EM131985228

Pitman Bakery is considering the purchase of a new $18,600 donut making machine. The new machine would permit the company to reduce the amount of part-time help needed, to a cost saving of $3,800 per year. In addition, the new machine would allow the company to produce a new type of donut, which would replace one existing type, resulting in the sale of 1,000 donuts with an additional $1.2 in revenue per donut. The new machine would have a 6-year life and will depreciated straight line. The salvage value at the end of year 6 is $9,125. The cost of capital is 12 percent.

1. Compute EBIT for each year. What is the EBIT in years 1 through 6? Tax rate is 40%.

3800

1900

1200

2. What is the after-tax salvage value?

5475

9125

3. What is the cash flow is year 0?

-18600

4. What are the cash flows in years 1-5?

3800

3100

4240

Compute the NPV and IRR.

$1606, 14.7

$2957, 14.7%

Reference no: EM131985228

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