The terminal cash flow for this project is (Use the following information): A pr
ID: 2744450 • Letter: T
Question
The terminal cash flow for this project is (Use the following information): A proposed power-saving equipment has a purchase price of $580,000. The equipment will be used in a four-year project but is classified as five-year MACRS property for tax purposes. The equipment is expected to save $280,000 before taxes per year in energy costs, and it will have a salvage value of $60,000 at the end of the project. To decide on the feasibility of the investment, the managers have ordered a series of tests to determine whether the proposed equipment will realize the required costs savings or not for a total cost of $18,000. The required rate of return on the equipment is 14% and it is expected to increase working capital by $45,000 at the beginning of the project. The tax rate is 35 percent and the MACRS depreciation schedule is as follows: Year 1 2 3 4 5 6 MACRS 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Question 23 options: 1) $29,078.40 2) $60,000.00 3) $72,785.54 4) $119,078.40
Explanation / Answer
Terminal Year Cash Flow = Return of Working Capital + Salvage value
Return of Working Capital = $45000 ( Working capital was positive in the beginning, taht is we required cash to start with the project, leading to cash outflow. So, at the end of the project, cash will be freed up and there will be inflow)
Depreciation for year 1 = $580000 * 20% = $116000
Depreciation for year 2 = $580000* 32% = $185600
Depreciation for year 3 = $580000* 19.20% = $111360
Depreciation for year 4 = $580000* 11.52% = $66816
Total Depreciation = $479776
Book value of the equipment = $580000 - $479776 = 100224
Salvage value = $ 60000
Loss on the sale of equipment = 100224 - 60000 = $40224
Terminal Cash flow = $60000 - .35( 60000 - 100224) = $74078
Total Terminal Cash Flow = $45000 + $74078 = $119078
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.