Use the following information to answer questions.
The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next 5 years. The necessary foundry and machining equipment will cost a total of $800,000 and will be depreciated on a straight-line basis to zero over the project’s life. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labor and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate.
What is the expected aftertax salvage value when the equipment is sold in year 5?
a. $ 65,000 b. $ 97,500 c. $100,000 d. $115,000 e. $120,125 9.
What is the annual depreciation tax shield for this project?
a. $ 20,000 b. $ 56,000 c. $100,000 d. $104,000 e. $120,000
What is the minimum bid price the firm should set as a sale price for the blocks if the firm were in a bidding situation?
a. $1,692 b. $1,927 c. $2,382 d. $2,564 e. $2,821