Thomson Media is considering some new equipment whose data are shown below. The equipment has a...

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Thomson Media is considering some new equipment whose data areshown below. The equipment has a 3 year tax life and would be fullydepreciated by the MACRS method over 3 years, but it would have apositive pre-tax salvage value at the end of year 3, when theproject would be closed down. Also, additional net operatingworking capital would be required, but it would be recovered at theend of the project's life. Revenues and other operating costs areexpected to be constant over the project's 3 year life.What is the project's total cash flow in year 3? Create atable. DO NOT USE EXCEL
-Net investment in fixed assests = $70,000
- Required net opertaing work capital = $15,000
-Depreciation (MACRS): 33% in year 1
45% in year 2
15% in year 3
7% in year 4
- Earnings before taxes & depreciation = $54,000
- Expected pre-tax salvage value = $6,000
- Tax Rate: 35%
- WACC: 8%

Answer & Explanation Solved by verified expert

3.7 Ratings (498 Votes)

Time line		0	3



Cost of new machine		-70000
Initial working capital		-15000
=Initial Investment outlay		-85000

3 years MACR rate			15.00%	7.00%

Profits			54000


-Depreciation	=Cost of machine*MACR%		-10500	4900	=Equipment cost*(1-0.33-0.45-0.15)=Salvage Value

=Pretax cash flows			43500
-taxes	=(Pretax cash flows)*(1-tax)		28275
+Depreciation			10500
=after tax operating cash flow			38775

reversal of working capital			15000

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)		3900
+Tax shield on salvage book value	=Salvage value * tax rate		1715
=Terminal year after tax cash flows			20615

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Transcribed Image Text

Thomson Media is considering some new equipment whose data areshown below. The equipment has a 3 year tax life and would be fullydepreciated by the MACRS method over 3 years, but it would have apositive pre-tax salvage value at the end of year 3, when theproject would be closed down. Also, additional net operatingworking capital would be required, but it would be recovered at theend of the project's life. Revenues and other operating costs areexpected to be constant over the project's 3 year life.What is the project's total cash flow in year 3? Create atable. DO NOT USE EXCEL-Net investment in fixed assests = $70,000- Required net opertaing work capital = $15,000-Depreciation (MACRS): 33% in year 145% in year 215% in year 37% in year 4- Earnings before taxes & depreciation = $54,000- Expected pre-tax salvage value = $6,000- Tax Rate: 35%- WACC: 8%