Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $600,758. The fixed asset will be depreciated straight-line to 61,283 over its 3-year tax life, after which time it will have a market value of $84,952. The project requires an initial investment in net working capital of $69,773. The project is estimated to generate $169,276 in annual sales, with costs of $144,969. The tax rate is 0.36 and the required return on the project is 0.12. What is the aftertax salvage value in year 3? (Make sure you enter the number with the appropriate +/- sign)

To find the after-tax salvage value in year 3 for the project, follow these steps:

1. **Determine the book value at the end of year 3:**
   The initial investment in the fixed asset is $600,758, and it is depreciated straight-line to $61,283 over 3 years. Therefore, the annual depreciation expense is:

   \[
   \text{Annual Depreciation} = \frac{600,758 - 61,283}{3} = \frac{539,475}{3} = 179,825
   \]

   The book value at the end of year 3 will be:

   \[
   \text{Book Value} = 600,758 - (179,825 \times 3) = 600,758 - 539,475 = 61,283
   \]

2. **Calculate the taxable gain or loss on the sale of the asset:**
   The market value at the end of year 3 is $84,952. The taxable gain (or loss) on the sale of the asset is the difference between the market value and the book value:

   \[
   \text{Taxable Gain (or Loss)} = \text{Market Value} - \text{Book Value} = 84,952 - 61,283 = 23,669
   \]

3. **Calculate the tax on the gain:**
   The tax rate is 36%. Therefore, the tax on the gain is:

   \[
   \text{Tax on Gain} = 23,669 \times 0.36 = 8,520.84
   \]

4. **Calculate the after-tax salvage value:**
   The after-tax salvage value is the market value minus the tax on the gain:

   \[
   \text{After-tax Salvage Value} = 84,952 - 8,520.84 = 76,431.16
   \]

So, the after-tax salvage value in year 3 is $76,431.16.

**Do you want details or have any questions?**

Here are 8 related questions to expand your understanding:

1. How is the book value of an asset determined at any given point in its life?
2. What is the significance of the market value of an asset at the end of a project's life?
3. How does straight-line depreciation affect the financial statements of a company?
4. What are the tax implications of selling a fixed asset above its book value?
5. How would the calculations change if the asset were depreciated using an accelerated depreciation method?
6. Why is it important to consider both the initial investment and the working capital when evaluating a project's feasibility?
7. How does the required rate of return impact the decision to undertake a project?
8. What other factors, besides financial ones, might a company consider when deciding to pursue an expansion project?

**Tip:** When analyzing investment projects, always consider both the financial and non-financial aspects to make a well-rounded decision.

Learn how to calculate the after-tax salvage value in year 3 for an expansion project using straight-line depreciation and taxation principles. This problem involves financial analysis, depreciation calculations, and tax implications. Suitable for business and finance professionals.

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