Assume that Kinston's new machine will be depreciated using MACRS according to the following ...

Year   0   1   2   3
Sales (revenues)      120,000   120,000   120,000
Cost of Goods Sold      60,000   60,000   60,000
- Depreciation      41,663   55,563   18,513
EBIT      18,338   4,438   41,488
-Taxes (35%)      6418   1553   14,521
= unlevered net income      11,919   2884   26,967
+ Depreciation      41,663   55,563   18,513
+ capital expenditures   -125,000         
+ Liquidation cash flows            12,992
            
Free Cash Flow   -125,000   53,582   58,447   58,471
PV of FCF (I = 10%)   -125,000   48,711   48,303   43,930
NPV =   15,944         

Liquidation/Salvage Value Calculation:

If the machine is depreciated straight line to a book value of 7.41% × 125,000 = $9263. So $15,000 - $9263 = $5737 gain on the sale which is taxable.  So the after tax salvage value = $15,000 - $7737 × .35 (tax rate) = $12,992.