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You are considering two machines, A and B that can be used for the same purpose

Finance Dec 26, 2020

You are considering two machines, A and B that can be used for the same purpose. Machine A costs $250,000, will reduce costs by $70,000 per year, needs net working capital of $20,000 at time zero which be released at the end of the project, has a 5 year straight line depreciable life and can be sold at the end of the project's life for $50,000. Machine B costs $320,000, will reduce costs by the same $70,000 per year, has net working capital of $40,000 at time zero (also released at the end of its life), has a ten year straight line depreciable life and can be sold at the end of its life for $60,000. Assume that the tax rate is 38% and the discount rate is 10%. What are the after tax salvage valuds for project A and B at the end of their lives? Don't include the annual operating cash flows in this calculation, just the salvage value plus or minus any tax benefit or liability.

Expert Solution

Machine A

+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate)         31000

=31000

Machine B

+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate)         37200

=37200

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