A corporation is evaluating the relevant cash flows for a capital budgeting deci

Question

A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $15,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary in- come and long-term capital gain. The terminal cash flow is

Explanation / Answer

Assuming 200% declining method Total Cost 100000 60000 36000 21600 10800 Years 1 2 3 4 5 Depriciation 40000 24000 14400 10800 10800 Working capital -5000 -5000 -5000 -5000 -5000 Increase in Cost 35000 19000 9400 5800 5800 Tax Rate @40% 14000 7600 3760 2320 2320 Net Cashflow -21000 -11400 -5640 -3480 -3480 Terminal Cashflow -45000

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