Looner Industries is currently analyzing the purchase of a new machine that cost $156,000 and requires $20,300 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $30,200 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages)

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

Percentage by recovery year*

Recovery year 3 years 5 years 7 years 10 years

1 33% 20% 14% 10%

2 45% 32% 25% 18%

3 15% 19% 18% 14%

4 7% 12% 12% 12%

5 12% 9% 9%

6 5% 9% 8%

7 9% 7%

8 4% 6%

9 6%

10 6%

11 4%

Totals 100% 100% 100% 100%

*These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention.

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) $8,815 or (2) $169,300(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.