A company wants to expand its operations. One capital investment proposal under consideration is the acquisition of additional equipment. The cost of initial investment is estimated to be $75,000 with useful life of 6 years and the disposal value of $15,000. Straight-line depreciation method will be used for both financial and tax purposes. The expansion will bring in an estimated $38,000 cash every year;the annual operating expenses are around $17,000. At the end of the third year, a one-time tune-up is required for a cost of $8,000. Because of the expansion, working capital in the amount of $14,000 must be committed. The tax rate and the discount rate are 40 percent and 12 percent, respectively. Required: 1. Evaluate the expansion proposal using the net present value analysis. 2. Assume that at the end of the fourth year, because of unforeseen reasons, the equipment is salvaged for $50,000. What are the tax consequences of the disposal?
A company wants to expand its operations. One capital investment proposal under consideration is the...
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