Net salvage value of a 3 year tax life asset
A new asset with a 3-year tax life is to be used in a 5-year project. The asset cost $200,000 and will be depreciated based on MACRS. The machine will generate revenues of $100,000 a year and operating expenses, excluding depreciation, is $40,000 a year. The asset is expected to be sold for $20,000 at the end of the project. Assume 34% tax rate and 11% required rate of return.
(a) Find what is the net salvage value of the asset?
(b) Show the NET cash flows of year 1 through year 5.
(c) Explain what is the NPV of the project? (Under MACRS, the depreciation rate for an asset with 3-year tax life is: 33.33%, 44.44%, 14.82%, 7.41%, in year1, year 2, year 3, and year 4 respectively).