Consider an asset that costs 264000 and is depreciated strai

Consider an asset that costs $264.000 and is depreciated straight-line to zero over its 11-year tax life. The asset is to be used in a 4-year project, at the end of the project, the asset can be sold for $33,000 Required If the relevant tax rate is 33 percent, what is the aftertax cash flow from the sale of this asset? (Do not round your Intermediate calculations.) O $65374200 O $81,42750 O $73.672.50 O$22.11000 $77,550.00

Solution

1) Sale value at EOY 4 33000 Book value of the asset = 264000-264000*4/11 = 168000 Loss on sale = 168000-33000 = 135000 Tax shield on loss on sale = 135000*33% = 44550 After tax cash flow from the sale of the asset 77550 2) Sales of new portable camper = 12540*7920 = 99316800 Add: Increase in sale of existing motor homes = 2970*29700 = 88209000 Less: Reduction in sale ofluxury motor coaches = 594*56100 = 33323400 Annual sales figure to be used for the project 154202400 3) Requirement 1: Annual pre-tax cost savings 178450.00 Depreciation = (610500/5) = 122100.00 Net pre-tax cost savings 56350.00 Tax at 31% 17468.50 After tax cash savings 38881.50 Add: Depreciation 122100.00 Incremental OCF 160981.50 PV of incremental OCF = 160981.50*(1.18^5-1)/(0.18*1.18^5) = 503416.68 PV of terminal non operating cash flow: Reinstatement of working capital -82500.00 After tax salvage value = 59400*(1-0.31) = 40986.00 Terminal non operating cash outflow -41514.00 PV of terminal non operating cash flow = -41514/1.18^5 = -18146.15 Total PV of cash inflows 521562.83 Less: Initial investment = 610500-82500 = 528000.00 NPV -6437.17 Requirement 2: Annual pre-tax cost savings 247800.00 Depreciation = (610500/5) = 122100.00 Net pre-tax cost savings 125700.00 Tax at 31% 38967.00 After tax cash savings 86733.00 Add: Depreciation 122100.00 Incremental OCF 208833.00 PV of incremental OCF = 208833*(1.18^5-1)/(0.18*1.18^5) = 653056.51 PV of terminal non operating cash flow: Reinstatement of working capital -82500.00 After tax salvage value = 59400*(1-0.31) = 40986.00 Terminal non operating cash outflow -41514.00 PV of terminal non operating cash flow = -41514/1.18^5 = -18146.15 Total PV of cash inflows 671202.66 Less: Initial investment = 610500-82500 = 528000.00 NPV 143202.66 Requirement 3: After tax savings should be less by =143202.66*(0.18*1.18^5)/(1.18^5-1) = 45793.04 {After tax savings in comparison with requirement] Pre-tax savings should be = 247800-45793.04/0.69 = 181433.28