our company is considering a machine that will cost $ 6,582 at Time 0 and which...

our company is considering a machine that will cost $ 6,582 at Time 0 and which can be sold after 3 years for $ 231 . To operate the machine, $ 418 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $ 981 /year for 3 years; variable operating costs (excluding depreciation) will be 56 percent of sales. Operating cash inflows will begin 1 year from today (at Time 1). The machine is in the 3-year MACRS class. The MACRS class has depreciation of 33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4. The company has a 30 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 percent cost of capital. Inflation is zero. What are the terminal cash flows associated with ending this project?

Note, I want only the Year 3 terminal cash flows, not the year 3 operating cash flows. Show your answer to the nearest $.01 Do not use the $ symbol in your answer.

Expert Solution

Time line		0	1	2	3



Cost of new machine		-6582
Initial working capital		-418
=Initial Investment outlay		-7000

3 years MACR rate			33.00%	45.00%	15.00%
Sales			981	981	981
Profits	Sales-variable cost		981	981	981

Operating cost			-549.36	-549.36	-549.36
-Depreciation	=Cost of machine*MACR%		-2172.06	-2961.9	-987.3

=Pretax cash flows			-1740.42	-2530.26	-555.66
-taxes	=(Pretax cash flows)*(1-tax)		-1218.294	-1771.182	-388.962
+Depreciation			2172.06	2961.9	987.3
=after tax operating cash flow			953.77	1190.72	598.34


reversal of working capital					418

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)				161.7
+Tax shield on salvage book value	=Salvage value * tax rate				138.222
=1. Terminal year after tax cash flows					717.92

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