Terminal cash flow-Various lives and sale prices Looner Industries is currently
ID: 2801612 • Letter: T
Question
Terminal cash flow-Various lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $159,000 and requires $19,900 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,600 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a 5-year recovery period (see the tableE for the applicable depreciation percentages) and expects to sell the machine to net $9,600 before taxes at the end of its usable life. The firm is subject to a 40% tax rate. a. Calculate the terminal cash flow for a usable life of (1) 3 years, (2) 5 years, and (3) 7 years. b. Discuss the effect of usable life on terminal cash flows using your findings in part a. c. Assuming a 5-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $8,945 or (2) $170,000 (before taxes) at the end of 5 years. d. Discuss the effect of sale price on terminal cash flow using your findings in part c. a. Calculate the terminal cash flow for a usable life of (1) 3 years, (2) 5 years, and (3) 7 years. The following table can be used to solve for the terminal cash flow: (Round to the nearest dollar.) 3-year Proceeds from sale of proposed asset +I- Tax on sale of proposed asset Total after-tax proceeds-new $ Change in net working capital Terminal cash flowExplanation / Answer
(a) Terminal cash flow for usable life of 3 years
Proceeds from sale of proposed assets = 9,600
Tax on sale of Propoposed asset = 0 (Since the book value is 0.07 *159,000 = 11,130 and the sale price is below book value)
Total after tax proceeds = 9,600
+ Change in Working capital = 29,600
Terminal Cash flow = $39,200
(b) Terminal cash flow for usable life of 5 years
Proceeds from sale of proposed assets = 9,600
Tax on sale of Propoposed asset = 660 ( book value is 0.05 *159,000 = 7,950. Tax is paid for (9,600 -7,950 =1,650) Taxes are 40% of 1,650 = 660)
Total after tax proceeds = 8,940
+ Change in Working capital = 29,600
Terminal Cash flow = $38,540
(c) Terminal cash flow for usable life of 7 years
Proceeds from sale of proposed assets = 9,600
Tax on sale of Propoposed asset = 1,296 ( book value is 0.04 *159,000 = 6,360. Tax is paid for (9,600 -6,360 =3,240) Taxes are 40% of 3,240 = 1,296)
Total after tax proceeds = 8,304
+ Change in Working capital = 29,600
Terminal Cash flow = $37,904
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