Terminal cash flow:Various lives and sale pricesLooner Industries is currently analyzing the purchase of a new machine that costs

$155,000

and requires

$19,600

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 five-year recovery period (see the table

LOADING...

for the applicable depreciationpercentages) and expects to sell the machine to net

$10,200

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

21%

tax rate.

a. Calculate the terminal cash flow for a usable life of (1) three years, (2) five years, and (3) seven years.

b. Discuss the effect of usable life on terminal cash flows using your findings in part a.

c.Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1)

$8,730

or (2)

$169,300

(before taxes) at the end of five years.

d. Discuss the effect of sale price on terminal cash flow using your findings in part c.

Question content area bottom

Part 1

a. Calculate the terminal cash flow for a usable life of (1) 3 years, (2) 5 years, and (3) 7 years.

Part 2

The following table can be used to solve for the terminal cash flow:(Round to the nearest dollar.)

		3-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	$

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%