A capital budgeting decision is being considered that would involve an expansion and simultaneous replacement of old equipment.  The project is expected to have a 6 year life for the firm.

This project will replace some existing equipment which currently has a book value (BV) of $200k and an estimated market salvage value of $375k.  The new project will require new equipment costing $2000k, which will be depreciated straight-line to a book value of $200k at the end of 6 years.  Due to new energy efficient technology, replacing the old equipment with the new more efficient equipment will generate an immediate tax credit of 5% of the equipment's cost.  The expansion will require an additional investment in NWC of $200k.

Sales are expected to increase by $1000k the first year and grow by 15% in years 2 and 3, then by 5% annually during the remaining 6 year life.  Cost of goods sold is forecasted to be 45% of the increased sales, and other selling and general administrative expenses are forecasted to be 10% of the increased sales.

It is forecasted that the new equipment will have a salvage value of $300k at the end of the project's 6 year life.  

The firm's weighted average cost of capital (WACC) for projects of this risk level is 8%.  The firm's marginal tax rate is T = 40%.

Questions: Calculate the following

• ATSV old @ t=0
• Equipment
• Tax Credit
• Depreciaton per year
• Sales period 1
• CoGS %of sales
• SG&A exp. %of sales
• ATSV new @ t=6

Answer rating: 100% (QA)

To calculate the values requested well go step by step ATSV old t0 The ATSV AfterTax Salvage Value of the old equipment at t0 is the market salvage va... View the full answer