The Target Copy Company is contemplating the replacement of its old printing mac

Question

The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $ 420. The new machine will operate for 3 years and then project will be shut down and all equipment sold. The old machine, which originally cost $ 462, has 2 years of depreciation remaining and a current book value of 22% of the original cost. The old machine has a current market value of $ 151 and should be worth $ 179 at the end of 3 years. The new printing machine could be sold for $ 236 in 3 years. If we buy the new machine our inventory levels will go from $600 to $900. Inventory levels will return to normal at the end of the project. Our annual sales will go from $15,000 to $20,000. Target's corporate tax rate is 25 percent. Both machines are in the 3-year MACRS class, with rates of 33% for year 1, 45% for year 2, 15% for year 3, and 7% for year 4. What are the expected Terminal Cash Flows at the end of year 3, if we replace the old printing machine? This could be a cash inflow or a cash outlay. Be sure to use the - sign should this be a cash outflow. Show your answer to the nearest $.01 Do not use the $ symbol in your answer.

Explanation / Answer

Terminal cash flow:

Book value of new machine at end of year 3 :cost [1-Total depreciation]

           = 420 [1-.33-.45-.15]

          = 420 *.07

          = 29.40

Gain on sale :sale value-book value

           = 236-29.4

         = 206.6

Tax on gain =206.6*.25 = $ 51.65

After tax sale value =sale value-tax

       = 236-51.65 =$ 184.35

2)working capital realized = 900-600 = 300

Terminal value = after tax sale value +working capital realized

      = 184.35+300

       = $ 484.35

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