Because the sale price of 50000 for the proposed new

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ecaptured depreciation of $30,000 ($50,000 sale proceeds $20,000 book value). Applying the ordinary tax rate of 40% to this $30,000 results in a tax of $12,000 (0.40 $30,000) on the sale of the proposed machine. Its after-tax sale proceeds would therefore equal $38,000 ($50,000 sale 13. As noted earlier, the change in net working capital is for convenience assumed to occur instantaneously‚ÄĒin this case, on termination of the project. In actuality, it may take a number of months for the original increase in net working capital to be worked down to zero. 14. In practice, the full net working capital investment may not be recovered. This occurs because some accounts receivable may not be collectible and some inventory will probably be obsolete, and so their book values cannot be fully realized. CHAPTER 8 Capital Budgeting Cash Flows 377 proceeds $12,000 taxes). Because the present machine would net $0 at termination and its book value would be $0, no tax would be due on its sale. Its aftertax sale proceeds would therefore equal $0. Substituting the appropri...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online