11.6 Computing terminal-year FCF: Healthy Potions, Inc., a pharmaceutical compan

Question

11.6 Computing terminal-year FCF: Healthy Potions, Inc., a pharmaceutical company, bought a machine that produces pain-reliever medicine at a cost of $2 million five years ago. The machine has been depreciated over the past five years, and the current book value is $800,000. The company decides to sell the machine now at its market price of $1 million. The marginal tax rate is 30 percent. What are the relevant cash flows? How do they change if the market price of the machine is $600,000 instead?

Explanation / Answer

If the market price of the machine is $1 million Gain on disposal of machine = ($1 million-$800,000)*(1-30%)=$140,000 Relevant cash flow = $140,000 If the market price of the machine is $600,000 Loss on disposal =$600,000- $800,000=-$200,000 Relevant cash flow = -$200,000

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