Tinney & Smyth Inc. is considering the purchase of a new batch polymer-bonding m

Question

Tinney & Smyth Inc. is considering the purchase of a new batch polymer-bonding machine for producing Crazy Rubber, a children's toy that is soft, pliable but also bouncy. The machine will increase EBITDA by$ 300,000per year for the next two years. Assume that operating cash flows occur at the end of each year. The machine's purchase price is $ 285,000and the salvage value at the end of two years is $ 51,300. The machine is classified as 3-year property. To run the Crazy Rubber production line the company will need to purchase an inventory of polydimethylsiloxane and boric acid for a total cost of $ 11,000. The MACRS depreciation rates for the first two years are 33.33 %and 44.45 %. The operating cash flows in Year 2 are $ 239,339and the tax on the sale of the machine is negative $ 4,209. The tax rate is 35 %. What are the terminal year cash flows for the project in Year 2 (including the operating cash flows)?

The net salvage is?. (Round to the nearest dollar.)

The terminal cash flow is?. (Round to the nearest dollar.)

Explanation / Answer

a.

Net Salvage value = Salvage value - Tax expenses

= $51,300 - $4,209

= $47,091

Net Salvage value after 2 year will be $47,091.

b.

Terminal Year cash flow = operating cash flow in year 2 + Net salvage value

= $239,339 + $47,091

= $286,430.

Terminal year cash flow is $286,430.

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