Terminal cash flowVarious lives and sale prices

Looner Industries is currently analyzing the purchase of a new machine that costs $156,000 and requires in $19,700 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 for the applicable depreciation percentages) and expects to sell the machine to net 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) $8,785 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.