York Company is considering a capital expenditure with the following estimated net cash inflows: YearEstimated Pretax Inflation

Question:

York Company is considering a capital expenditure with the following estimated net cash inflows:
YearEstimated Pretax Inflation Adjusted Net Cash Inflow
1 .......................................................$30,000
2 ....................................................... 40,000
3 ....................................................... 50,000
4 ....................................................... 60,000
5 ....................................................... 70,000
6 ....................................................... 80,000
7 ....................................................... 60,000
The equipment required for the project will have an initial cost of $200,000, and it is not expected to have any at the end of the life of the project. The equipment will be depreciated using the straight-line method over its economic life of 7 years for book purposes; however, it qualifies as 5-year property for tax purposes. The company's effective tax rate is 40%.
Required:
Determine the estimated after-tax net cash inflow for each of the project's 7 years, and compute the total excess of cash inflows over cash outflows for the life of the project. (Use the MACRS rates provided in Exhibit 22-4 to compute tax depreciation.) Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...