A company is considering a 3-year project that requires paying $5,000,000 for a cutting-edge production equipment. This equipment falls into the 5-year MACRS class and will have a market value of quarter its original purchase price after 2 years. The project requires an initial investment in net working capital of $350,000. The project is estimated to generate $1,200,000 in annual operating cash flows. The company faces a 40% tax rate. The required rate of return on projects like this one is 10 percent.
Based on this information, answer the following questions. (Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher. Only round your final answer to TWO decimal places: for example, 10,000.23.)
1. The After-Tax Salvage Value of the production equipment at the end of the 2nd year equals # #1#2#3#4#5.
a. $2,460,000
b. $2,076,000
c. $1,944,600
d. $1,710,000
e. $1,326,000
2. The change in Net Working Capital at the end of the 2nd year equals
a. $1,050,000
b. $700,000
c. $350,000
d. $0
e. –$350,000
Answers: 1
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