Please help me explain why we are using salvage value of 10,000 and not 6000 (10,000*.60)

Here is the question:

Company is considering undertaking a capital project:

The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new eq. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new eq, which will be depreciated on a straight line basis is expected to have salvage value of $10,000.

The existing eq. that would be sold to make room for the project has a historical cost of $220,000 and acc. dep of $208,000. It has an estimated remaining life useful life of 2 years and the remaining carrying amount is being depreciated on a straigh line basis. A scrap dealer has agreed to buy it for $8000. Tax tate is 40%.

Q' The company's expected total cash inflow in the final year of the project is?

A: $100,000

Please help.

Sorry for the late response:

Here is the solution:

24,000 working Capital

+ 60,000 NI

+ 6,000 Depreciation Tax Shield

+ 10,000 Salvage Value

100,000

Why use 10,000 instead of 6,000 ..

My guess is,

by the end of year 10,

NBV of the equipment will be 10,000, as depreciation was calculated taking into consideration the 10,000 salvage value.

and assuming the equipment will be sold for 10,000 as the salvage value, so no gain or loss, and the company will pay no tax, and hence cash inflow will be just the 10,000.

I hope this helps.

I did the question, and came up with $100K:

Net Income $100K

Working Capital $24K

Salvage Value $10K

Less Income Tax ($34K) ($100K-$15K * 40%)