The terminal cash flow for this project is (Use the following information): A pr

Question

The terminal cash flow for this project is (Use the following information): A proposed power-saving equipment has a purchase price of $580,000. The equipment will be used in a four-year project but is classified as five-year MACRS property for tax purposes. The equipment is expected to save $280,000 before taxes per year in energy costs, and it will have a salvage value of $60,000 at the end of the project. To decide on the feasibility of the investment, the managers have ordered a series of tests to determine whether the proposed equipment will realize the required costs savings or not for a total cost of $18,000. The required rate of return on the equipment is 14% and it is expected to increase working capital by $45,000 at the beginning of the project. The tax rate is 35 percent and the MACRS depreciation schedule is as follows: Year 1 2 3 4 5 6 MACRS 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Question 23 options: 1) $29,078.40 2) $60,000.00 3) $72,785.54 4) $119,078.40

Explanation / Answer

Solution is provided with full explanation.

First calculate the depreciation annually to be paid.

With given information, the cashflows are projected as shown below:

So, the required answer is 4) 119,078.4

Depreciable amount $580,000 Annual Depreciation Year 1 (20%) $116,000.0 Year 2 (32%) $185,600.0 Year 3 (19.2%) $111,360.0 Year 4 (11.52%) $66,816.0 Total $479,776.0 Undepreciated value at the end of year 4 $100,224.0

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