CHAPTER 10
B181
The book value at the end of year five is thus:
BV
5
= $548,000 – 342,500
BV
5
= $205,500
The asset is sold at a loss to book value, so the depreciation tax shield of the loss is recaptured.
Aftertax salvage value = $105,000 + ($205,500 – 105,000)(0.35)
Aftertax salvage value = $140,175
To find the taxes on salvage value, remember to use the equation:
Taxes on salvage value = (BV – MV)t
c
This equation will always give the correct sign for a tax inflow (refund) or outflow (payment).
8.
To find the BV at the end of four years, we need to find the accumulated depreciation for the first four
years. We could calculate a table as in Problem 6, but an easier way is to add the MACRS depreciation
amounts for each of the first four years and multiply this percentage times the cost of the asset. We can
then subtract this from the asset cost. Doing so, we get:
BV
4
= $7,900,000 – 7,900,000(0.2000 + 0.3200 + 0.1920 + 0.1152)
BV
4
= $1,365,120
The asset is sold at a gain to book value, so this gain is taxable.
Aftertax salvage value = $1,400,000 + ($1,365,120 – 1,400,000)(.35)
Aftertax salvage value = $1,387,792
9.
Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final
answer will be the same no matter which of the four methods you use.), we get:
OCF = (Sales – Costs)(1 – t
C
) + t
C
Depreciation
OCF = ($2,650,000 – 840,000)(1 – 0.35) + 0.35($3,900,000/3)
OCF = $1,631,500
10.
Since we have the OCF, we can find the NPV as the initial cash outlay plus the PV of the OCFs, which
are an annuity, so the NPV is:
NPV = –$3,900,000 + $1,631,500(PVIFA
12%,3
)
NPV = $18,587.71
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 Spring '06
 Tapley
 Finance, Cash Flow Statement, Depreciation, OCF, Generally Accepted Accounting Principles, aftertax salvage value

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