Problem
A company purchased equipment at a cost of $120,000. Net income is estimated at $30,000/Yr. The estimated life of the equipment is 10 years, and it is estimated that the salvage value at the end of its life is $20,000. The company is using the straight-line depreciation method. The tax rate for the company is 25% and the cost of capital is 12%.
a. Calculate and draw the after tax cash flow of this purchase for the next five years.
b. If the company (which is profitable overall) sells this equipment at the end of the fifth year at a price of $35,000, and capital gain/loss has tax effects just as a regular income (i.e., at 25%), what would be the expected NPW of this project referred to at the time of the purchase?