This question has been posted a couple of times. Once gave an answer that is not

Question

This question has been posted a couple of times. Once gave an answer that is not even on the list of multiple choice. The other gave the answer but not the work on how to arrive at the answer. I need to know how to get there for future questions.

PDF Corp. needs to replace an old lathe with a new, more effi cient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straightline basis over a ten-year useful life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. PDF’s marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project’s ten-year life. What is the project’s terminal cash flow?

a. $8,000
b. $6,000
c. $5,000
d. $3,000

Please be very specific and show all of the work on how to get to the answer.

Thanks

Explanation / Answer

The option "b" is the correct answer: Working note : The salvage value 5000 less: Tax 40% 2000 Cash Flow after Tax 3000 Add: Working capital recoverd 3000 The terminal cash flow 6000 The salvage value 5000 less: Tax 40% 2000 Cash Flow after Tax 3000 Add: Working capital recoverd 3000 The terminal cash flow 6000 The salvage value 5000 less: Tax 40% 2000 Cash Flow after Tax 3000 Add: Working capital recoverd 3000 The terminal cash flow 6000

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