Your company is considering expanding to sell your product in Alabama. You estimate an increase in revenues
Question:
Your company is considering expanding to sell your product in Alabama. You estimate an increase in revenues of $750,000 each year for the next five years. The plant and equipment (new fixed assets) needed to manufacture additional goods costs $2,000,000 and will be depreciated on a straight-line basis to $500,000 over the five year project. In five years, you anticipate selling these assets for $1,000,000.
This new plant and equipment would be built on land the company bought 3 years ago for $35,000. The company could sell this land today for $40,000 (if you do not accept the project), or the company could sell the land 5 years from now for $45,000 (when the project is over, if you accept the project).
Additional manufacturing costs to produce additional products would total $225,000 each year. Your company expects to increase net working capital by $50,000 if the project is accepted, but net working capital will revert to the original level when the project is complete. The tax rate is 10%.
What is the after-tax salvage value of the fixed assets (to be clear: the fixed asset but not the land)?
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford