Question

In: Finance

A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate...

A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $15,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow is ________.
A) $24,000
B) $16,000
C) $14,000

The answer is B, please write down the explanation!

Solutions

Expert Solution

Cost of asset   (80000+20000)       $100,000.00
less : 5 year Depreciation provided =           -$95,000.00
(20%+32%+19%+12%+12%)*100000          
Book value           $5,000.00
          
Sale value           $15,000.00
Sale value is more than book value. So Capital gain = Sale Value - book value=           $10,000.00
tax on capital gain (@ 40% of 9040)=           $4,000.00
          
          
Calculation of Terminal cash inflows   
          
Sale proceeds from equipment           $15,000.00
          
less: Tax on capital gain of sale of asset           -$4,000.00
          
Decline of working capital           $5,000.00
______________________________________________

Terminal cash inflow is           $16,000.00


_____________________________________________
          
          


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