Given: Base price of equipment = $140,000 Cost to modify equipment = $30,000 MAR

Question

Given:
Base price of equipment = $140,000
Cost to modify equipment = $30,000
MARCS 3-year class and would be sold after 3 years for $60,000
Applicable depreciation rates are 33, 45, 15, and 7 percent
Equipment requires an $8,000 increase in working capital (spare parts inventory)
Project has no effect on revenues but should save the firm $50,000 per year before-tax labor costs
Firm's marginal federal=plus tax rate is 40%
What is the firms's operating cash flow in years 1, 2, and 3?

Answer
Operating Cash Flows Year 1 Year 2 Year 3
After-tax savings 30000 30000 30000
Depreciation tax savings 22440 30600 10200
Net Operating Cash Flow 52440 60600 40200

OK, thanks to a Cramster genius I now understand net operating cash flow. Thank you. But, I'm stumped on terminal cash flow. I know the answer is $48,760 because it was in the back of the textbook. But, how do I arrive at that number?

Explanation / Answer

What is the terminal cash flow? Salvage value $60000 Less: Tax on SV*($19240) Add : Return of Wrkg Capital $8000 ---------------------------------------------- Terminal Value $48760 ---------------------------------- *Tax on SV = ($60000 –$11900)(0.4) = $19240. Remaining BV in Year 4 = $170000 (0.07) = $11900.

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