Q7. You are anaiyzing the purchase of new equipment. Since you are not an expert
ID: 1174741 • Letter: Q
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Q7. You are anaiyzing the purchase of new equipment. Since you are not an expert on this type of equipment, you hire a consulting firm to make recommendations. The consultant charged you RM1,500 and recommended the purchase of the latest model from ACME Corp. of America. The equipment costs RM80,000, and it will cost another RM10,000 to modify it for special use by your firm. The equipment will be depreciated on a straight- line basis over six years with no salvage value. You expect the equipment will be soid after three years for RM28,000. Use of the equipment will require an increase in your company's net working capital of RM4,000, but this RM4,000 will be recovered at the end of year three. The use of the equipment will have no effect orn revenues, but it is expected to save the firm RM50,000 per year in before-tax operating costs. Your company's marginal tax rate is 35%, what is the terminal cash flow for this project? a. RM37,950 b. RM33,950 c. RM24,500 d. (RM17,000)Explanation / Answer
Equipment Cost = 80000+10000 = 90000
Life = 6 Years
Annual Dep = 90000/6 = 15000
Dep for 3 years = 15000*3 = 45000
Book Value after 3 years = 90000-45000 = 45000
Sale Value after 3 years = 28000
Loss on Sale = 28000-45000 = 17000
Tax Saving on loss on Sale = 35%*17000 = 5950
Terminal Value = Cash Inflow on sale of equipment + Tax Saving On Loss of Sale + Recovered Working Capital
Terminal Value = 28000 + 5950 + 4000
Terminal Value = 37950
a. RM 37950
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