Question

A complete small business computer system costs $40,000. In addition, it paid a consultant $1000 last year for her advice on the type of computer system the company should buy. The new computer falls under the 5-year MACRS. This new system is expected to generate additional revenue of $15,000 per year for the next 3 years and also reduce expenses by $10,000 per year. At the end of 3 years, the system will be sold for $17,500. Tax rate is 34%. Round all values to the nearest dollar. Calculate initial investment, operating cash flows and terminal cash flow.

can you please show me terminal cash flow

here's what I have and clarify I'm right for first parts, thanks!

Initial Investment

Cost 40,000

Total Initial 40,000

Year	1	2	3
Revenue	15,000	15,000	15,000
Costs	-10,000	-10,000	-10,000
EBDT	25,000	25,000	25,000
Depreciation	8000	12800	7680
EBT	17000	12200	17320
Tax at 34%	5780	4148	5888.80
NIAT	11220	8052	11431.20
Depreciation	8000	12800	7680
CFAT	19220	20852	19,111.20

Answer 1

Tax rate		34%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3			Total
Cost		$       40,000	$        40,000	$         40,000
Dep Rate		20.00%	32.00%	19.20%
Depreciation	Cost * Dep rate	$         8,000	$        12,800	$           7,680			$         28,480
Calculation of after-tax salvage value
Cost of machine			$   40,000.00
Depreciation			$   28,480.00
WDV	Cost less accumulated depreciation	$   11,520.00
Sale price			$   17,500.00
Profit/(Loss)	Sale price less WDV		$     5,980.00
Tax	Profit/(Loss)*tax rate		$     2,033.20
Sale price after-tax	Sale price less tax		$   15,466.80
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3
Additional revenue		$ 15,000.00	$   15,000.00	$    15,000.00
Add cost saving		$ 10,000.00	$   10,000.00	$    10,000.00
Toal saving		$ 25,000.00	$   25,000.00	$    25,000.00
Less: Depreciation		$    8,000.00	$   12,800.00	$      7,680.00
Profit before tax (PBT)		$ 17,000.00	$   12,200.00	$    17,320.00
Tax@34%	PBT*Tax rate	$    5,780.00	$     4,148.00	$      5,888.80
Profit After Tax (PAT)	PBT - Tax	$ 11,220.00	$     8,052.00	$    11,431.20
Add Depreciation	PAT + Dep	$    8,000.00	$   12,800.00	$      7,680.00
Cash Profit after-tax		$ 19,220.00	$   20,852.00	$    19,111.20
Annual cash flows
Year		Capital		Operating cash flow	Annual Cash flow
0		$(40,000.00)			$   (40,000.00)
1				$    19,220.00	$    19,220.00
2				$    20,852.00	$    20,852.00
3		$ 15,466.80		$    19,111.20	$    34,578.00