Terminal cashflow-Variouslives and sale prices

Looner Industries is currently analyzing the purchase of a new machine that costs $ 161, 000 and requires $ 19 ,900 in installation costs. Purchase of this machine is expected to result in an increase in networking capital of $ 30,100 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 $ 10,200 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, 045 or (2) $ 170,100 (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.

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 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%