PDF corp needs to replace an old lathe with a new, more efficient model. The old

Question

PDF corp needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value on $5000. (the old machine is being depreciated on a straight line basis over a ten year useful life) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2000. The new machine is also being depreciated on a straight line basis over ten years.Sales are expected to increase by $8000 per year while operating expenses are expected to decrease by $12,000 per year. PDF's marginal tax rate is 40%. Additional working capital of $3000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5000 at the end of th eproject's 10 year life, What is the projects terminal cash flow?

Explanation / Answer

Terminal cash flow : [(terminating years net cash flow +salvage value)*(1-tax ) + ne working capital] it is the cahs flow at ending stage of the project in our problenm the last stage cash flow is scrap value or salvage value = $5000 here Working ccapital = $3000 there fore terminal cash flow is nothing but projects last year cashflow. here depreciation = [(100000+10000) -2000]10 = 108000/10 =$10800 since $2000 gain from old machine and it life is 10 years. it decrease 12000 operating expenses means tht it is also gain for the last year is 12000 increase 8000 sales and needs additional Working capital is $3000 there fore terminal cash flow for the last year is : [12000(gain)+ 8000(sales)+$5000 (scrap value)-10800 (deprciation)*(1 -40%(tax rate)) + $ 3000 (WC)] = $8520+ $3000 $11520

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