Problem:

Schroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equpment at the end of the project for 10% of its original cost. Annual sales from this project are estimated at $2.3 million. Net working capital equal to 10% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. Schroeder desires a 12% rate of return on this project. The tax rate is 40%.

Required:

Question 1: What is the value of the depreciation tax shield in year 2 of the project?

Question 2: What is the amount of the after-tax salvage value of the equipment?

Question 3: What is the recovery amount attributable to net working captial at the end of the project?

Note: Show supporting computations in good form.