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question 78

Essay

Use the information for the question(s)below.
Kinston Industries is considering investing in a machine that will cost $125,000 and will last for three years.The machine will generate revenues of $120,000 each year and the cost of goods sold will be 50% of sales.At the end of year three the machine will be sold for $15,000.The appropriate cost of capital is 10% and Kinston is in the 21% tax bracket.
-Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5,000 at the end of year three.What is the NPV for this project?

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Definitions:

Section 1245 Gain

A tax term referring to the gain from the sale or disposal of certain types of depreciable property, where the gain is recaptured as ordinary income.

Ordinary Income

Refers to the type of income earned by an individual that is subject to standard tax rates, including wages, salaries, commissions, and income from interest or dividends.

Long-Term Capital Losses

Losses incurred from selling assets that have been held for over a year, which can be applied to counterbalance capital gains when calculating taxes.

Short-Term Capital Gains

Profits from the sale of an asset held for one year or less, typically taxed at higher rates than long-term capital gains.