Sullivan Company plans to acquire a new asset that costs $400,000 and is anticipated to have a salvage value of $30,000 at the end of four years. Sullivan’s policy is to depreciate all assets with the use of straight-line depreciation with no half-year convention. The new asset will replace an old asset that currently has a tax basis of $80,000 and can be sold for $60,000 now. Sullivan will continue to earn the same revenues of $200,000 per year that it earned with the old asset. However, savings in operating costs will be $120,000 in each of the first three years and $90,000 in the fourth year. Sullivan is subject to a 40 percent tax rate and has an after-tax cost of capital of 10 percent.
A. What is the present value of the depreciation tax shield for the new asset for Year 1? Round your answer to the nearest whole number.
B. What is the investment’s net present value (after tax)? Round your answer to the nearest whole number.