Terminal cash flowVarious lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $155,000 and requires $20,400 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $30,500 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 for the applicable depreciation percentages) and expects to sell the machine to net $10,100 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) $8,770 or (2) $169,800 (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. - X Data Table The following table can be used to solve for the terminal cash flow: (Round to the ne 3-year 5 years 10 years $ $ Proceeds from sale of proposed asset +/- Tax on sale of proposed asset Total after-tax proceeds-new + Change in net working capital 3 years 33% 45% 15% 7% $ Percentage by recovery year* 7 years 20% 14% 32% 25% 19% 18% 12% 12% 12% 9% 5% 9% 9% 4% $ Terminal cash flow Recovery year 1 2 3 4 5 6 7 8 9 10 11 Totals $ 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100% Enter any number in the edit fields and then click Check Answer. 6 parts remaining 100% 100% 100% Terminal cash flowVarious lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $155,000 and requires $20,400 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $30,500 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 for the applicable depreciation percentages) and expects to sell the machine to net $10,100 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) $8,770 or (2) $169,800 (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. - X Data Table The following table can be used to solve for the terminal cash flow: (Round to the ne 3-year 5 years 10 years $ $ Proceeds from sale of proposed asset +/- Tax on sale of proposed asset Total after-tax proceeds-new + Change in net working capital 3 years 33% 45% 15% 7% $ Percentage by recovery year* 7 years 20% 14% 32% 25% 19% 18% 12% 12% 12% 9% 5% 9% 9% 4% $ Terminal cash flow Recovery year 1 2 3 4 5 6 7 8 9 10 11 Totals $ 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100% Enter any number in the edit fields and then click Check Answer. 6 parts remaining 100% 100% 100%
