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Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. The analyst is attempting to determine the appropriate ''end-of-life cash flows for the analysis. At the end of 8 years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000. and scrap salvage value of $10,000. Kore's effective tax rate is 40%. Valiant is the appropriate endow-life cash flow related to these items that should be used in the analysis?
The tax basis of $75,000 and the $40,000 cost to remove can be written off. However, the - $10,000 scrap value is a cash inflow. Thus, the taxable loss is $105,000 ($75,000 loss on disposal + $40,000 expense to remove ---$10,000 of inflows). At a 40% tax rate, the $ 105.000 loss will produce a tax savings (inflow) of $42,000. The final cash flows will consist of an outflow of $40,000 (cost to remove) and inflows of $10,000 (scrap) and $42,000 (tax savings), or a net inflow of $12,000.