Question

Your company, Dominant Retailer, Inc., is considering a project whose data are shown below. Revenue and cash operating expenses are expected to be constant over the project's 5 year expected operating life; annual sales revenue is $99,000.00 and cash operating expenses are $49,750.00. The new equipment's cost and depreciable basis is $155,000.00 and it will be depreciated by MACRS as 5 year property. The new equipment replaces older equipment that is fully depreciated but can be sold for $7,000. In addition, the new equipment requires an additional $5,000 of net operating working capital, which can be fully recovered at the end of the project. The new equipment is expected to be sold for $10,750 at the end of the project in year 5. The marginal tax rate is 20.00%. , what is the Terminal Year Non–Operating Cash Flow at the end of Year 5? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

Computation of depreciation and book value of new asset:

After tax salvage value of old assets = Market value x (1-tax rate)

                                                               = $ 7,000 x (1 – 0.2)

                                                              = $ 7,000 x 0.8 = $ 5,600

Depreciable basis of new assets = Purchasing cost - After tax salvage value of old assets

                                                        = $ 155,000 - $ 5,600 = $ 149,400

Year (n)	Depreciable Basis (a)	MACRS Rate (b)	Annual Depreciation (cn = a x b)	Accumulated Depreciation ∑ cn	Ending Book value (a -∑ cn)
1	$149,400	0.2	$29,880	$29,880	$119,520
2	0.32	47,808	77,688	71,712
3	0.192	28,684.8	106,372.8	43,027.2
4	0.1152	17,210.88	123,583.68	25,816.32
5	0.1152	17,210.88	14,0794.56	8,605.44
6	0.0576	8,605.44	149,400	0

Book value of asset at the end of 5th year is $ 8,605.44

Terminal non-operating cash flow = After tax proceeds from Disposal + Change in working capital

                                                           = $ 10,750 – [($ 10,750 - $ 8,605.44) x tax rate] + $ 5,000

                                                           = $ 10,750 – [($ 2,144.56) x 0.2] + $ 5,000

                                                          = $ 10,750 – $ 428.912 + $ 5,000

                                                          = $ 15,321.088 or $ 15,321.09

Answer: 15321.09