78. What is the cash flow recovery from net working capital at the end of this project? Net working capital recovery = $160,000 + $35,000 - $100,000 = $95,000Difficulty level: MediumTopic: RECOVERY OF NET WORKING CAPITALType: PROBLEMSLouie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%.79. What is the value of the depreciation tax shield in year 2 of the project? Depreciation tax shield = $1,400,000 ÷7 ×.34 = $68,000Difficulty level: MediumTopic: DEPRECIATION TAX SHIELDType: PROBLEMS6-70

Chapter 06 - Making Capital Investment Decisions80. What is the amount of the after-tax salvage value of the equipment? After-tax salvage value = $1,400,000 ×.20 ×(1 - .34) = $184,800Difficulty level: MediumTopic: AFTER-TAX SALVAGE VALUEType: PROBLEMS81. What is the recovery amount attributable to net working capital at the end of the project? NWC recapture = .20 ×$1,200,000 = $240,000Difficulty level: MediumTopic: CHANGE IN NET WORKING CAPITALType: PROBLEMSSchroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equipment at the end of the project for 10% of its original cost. Annual sales from this project are estimated at $2.3 million. Net working capital equal to 10% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. Schroeder desires a 12% rate of return on this project. The tax rate is 40%.6-71

Chapter 06 - Making Capital Investment Decisions82. What is the value of the depreciation tax shield in year 2 of the project? Depreciation tax shield = $5,000,000 ÷5 ×.40 = $400,000Difficulty level: MediumTopic: DEPRECIATION TAX SHIELDType: PROBLEMS