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Homework answers / question archive / calculate the terminal cash flow if you know that the proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $2,000
calculate the terminal cash flow if you know that the proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $2,000. 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 income and long-term capital gain.
Solution:
Depreciable amount of assets include installation cost also.
Book Value of machine at the end of year 5 is:
=Original cost*(1-depreciation rate till 5th year)
=($80,000+$20,000)*(1-0.9424)
=$5760
Since the book Value of machine at the end of 5 years,hence there is no capital gain and consequently there is no capital gain tax.Accordingly,terminal cash flow is
=Sale price of machine+decline in working capital
=$2000+$5000=$7,000
