Terminal cash

flowlong dashVarious

lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs

$ 163 comma 000$163,000

and requires

$ 20 comma 500$20,500

in installation costs. Purchase of this machine is expected to result in an increase in net working capital of

$ 29 comma 500$29,500

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

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for the applicable depreciation, percentages) and expects to sell the machine to net

$ 10 comma 300$10,300

before taxes at the end of its usable life. The firm is subject to a

40 %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)

$ 9 comma 175$9,175

or (2)

$ 170 comma 100$170,100

(before taxes) at the end of 5 years.