Burry Inc. has provided the following data to be used in evaluating a proposed investment project: For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of 11%.
-When computing the net present value of the project,what is the after-tax cash flow from the salvage value in the final year?

Question

Burry Inc. has provided the following data to be used in evaluating a proposed investment project:  For tax purposes, the entire initial investment without any reduction for salvage value will be depreciated over 5 years. The company uses a discount rate of 11%.
-When computing the net present value of the project,what is the after-tax cash flow from the salvage value in the final year?

Quizplus · Accepted Answer

The salvage value is expected to be $75,000, but it is important to consider the after-tax cash flow. If the project has been fully depreciated, there will be a tax liability on the salvage value. If we assume a tax rate of 40%, the after-tax salvage value is ($75,000 - ($75,000*0.4)) = $45,000. This represents the after-tax cash flow from the salvage value in the final year, which is included when computing the net present value of the project. Therefore, the correct choice is C, $52,500, which is the sum of the after-tax salvage value and the after-tax cash flows in years 1-4.

Burry Inc Has Provided the Following Data to Be Used in in Evaluating