Terminal cash flowVarious lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $165,000 and requires $19,600 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,700 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 $10,500 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) $9,230 or (2) $169,200 (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. a. Calculate the terminal cash flow for a usable life of (1)3 years, (2) 5 years, and (3) 7 years. The following table can be used to solve for the terminal cash flow: (Round to the nearest dollar.) i Data Table 3-year 10,500 (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) $ Proceeds from sale of proposed asset +/- Tax on sale of proposed asset Total after-tax proceeds new + Change in networking capital $ $ $ Terminal cash flow 1 14% (Round to the nearest dollar.) 5-year Proceeds from sale of proposed asset +/- Tax on sale of proposed asset Total after-tax proceeds-new $ $ 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 33% 20% 10% 2 45% 32% 25% 18% 3 15% 1994 18% 14% 4 7% 12% 12% 12% 5 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% B 4% 9 10 6% 11 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 purTICSRS ha sura in annly the achal $ $ + Channa in networking portal Enter any number in the edit fields and then continue to the next question. ? Mvunu LU LIIC TICAICOL uoliai.) 5-year Proceeds from sale of proposed asset $ $ +/- Tax on sale of proposed asset Total after-tax proceeds-new + Change in net working capital $ Terminal cash flow $ (Round to the nearest dollar.) 7-year Proceeds from sale of proposed asset $ +/- Tax on sale of proposed asset $ Total after-tax proceeds-new $ + Change in net working capital $ Terminal cash flow $ b. Discuss the effect of usable life on terminal cash flows using your findings in part a. (Select from the drop-down menus.) If the usable life is than the normal recovery period, the asset has not been depreciated fully and a tax benefit may be taken on the ; therefore, the terminal cash flow is c. Assuming a 5-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,230 or (2) $169,200 (before taxes) at the end of 5 years. The following table can be used to solve for the terminal cash flow: (Round to the nearest dollar.) (1) Proceeds from sale of proposed asset $ $ +/- Tax on sale of proposed asset Total after-tax proceeds-new + Change in net working capital Terminal cash flow $ (Round to the nearest dollar.) (2) Proceeds from sale of proposed asset $ +/- Tax on sale of proposed asset Total after-tax proceeds-new $ + Change in net working capital $ Terminal cash flow d. Using your findings in part c., what is the effect of sale price on terminal cash flows? (Select from the drop-down The the sale price, the higher the terminal cash flow
