Computing terminal-year FCF: Five years ago, a pharmaceutical company bought a m

Question

Computing terminal-year FCF: Five years ago, a pharmaceutical company bought a machine that produces pain-reliever medicine at a cost of $2 million. The machine has been depreciated over the past five years, and the current book value is $1,000,000. The company decides to sell the machine now at its market price of $1 million. The marginal tax rate is 34 percent.







Incorrect.


1.What is the relevant cash flow for the machine project?

$








Incorrect.


2.What is the relevant cash flow if the market price of the machine is $600,000 instead?

$

Explanation / Answer

The gain on the sale would be $1,000,000 – $800,000 = $200,000 Taxes on the gain are: $200,000 * .3 = $60,000 Net cash flow from the sale is $1,000,000 – $60,000 = $940,000 How do they change if the market price of the machine is $600,000 instead? The gain on the sale would be $600,000 – $800,000 = $-200,000 Taxes on the gain are: $-200,000 * .3 = $-60,000 If the market price changes to $600,000 would be sold with a lost.

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