Terminal cash flow-Replacement decision Russell Industries is considering replac

Question

Terminal cash flow-Replacement decision Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $206,000 and will require $29,200 in installation costs. It wil be depreciated under MACRS using a 5-year recovery period (see the table EEB for the applicable depreciation percentages) A $24,000 increase in net working capital will be required to support the new machine. The firm's managers plan to evaluate the potential replacement over a 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $16,500 before taxes, the new machine at the end of 4 years will be worth $76,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a 40% tax rate. The terminal cash flow for the replacement decision is shown below (Round to the nearest dollar.) Proceeds from sale of new machine Tax on sale of new machine Total after-tax proceeds-new asset Proceeds from sale of old machine Tax on sale of old machine Total after-tax proceeds-old asset Change in net working capital Terminal cash flow

Explanation / Answer

Workings

Proceeds From Sale of New Machine 76000 Tax on Sale of New machine 14406 Total After Tax Proceeds new asset 61594 Proceeds From Sale of old Machine -16500 Tax on sale of old machine 6600 Total after-tax proceeds-old asset -9900 Change in net working capital 24000 Terminal cash flow 75694

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