Finance

erminal cash

Flow long dash—Various

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lives and sale price Looner Industries is currently analyzing the purchase of a new machine that costs

$ 165 comma 000$165,000

and requires

$ 19 comma 600$19,600

in installation costs. Purchase of this machine is expected to result in an increase in net working capital of

$ 29 comma 800$29,800

to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a​ 5-year recovery period​ (see the table

LOADING…

for the applicable depreciation​ percentages) and expects to sell the machine to net $ 9 comma 500$9,500

before taxes at the end of its usable life. The firm is subject to a 40 %40% tax rate.

a. Calculate the terminal cash flow for a usable life of ​ (1) 3​ years, (2) 5​ years, and  (3) 7 years.

b. Discuss the effect of usable life on terminal cash flows using your findings in part a.

c. Assuming a​ 5-year usable​ life, calculate the terminal cash flow if the machine were sold to net​ (1)

$ 9 comma 230$9,230 or​ (2)

$ 171 comma 000$171,000

​(before taxes) at the end of 5 years.

d. Discuss the effect of sale price on terminal cash flow using your findings in part c.

a. Calculate the terminal cash flow for a usable life of ​ (1) 3​ years, (2) 5​ years, and  (3) 7 years.

The following table can be used to solve for the terminal cash​ flow:  ​(Round to the nearest​ dollar.)

3-year
Proceeds from sale of proposed asset $
+/- Tax on sale of proposed asset $
Total after-tax proceeds-new $
+ Change in net working capital $
Terminal cash flow $

 

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