Denver Auto Wash is contemplating the purchase of a new high-speed washer to rep

Question

Denver Auto Wash is contemplating the purchase of a new high-speed washer to replace the existing washer. The existing washer was purchased two years ago at an installed cost of $120,000; it was being depreciated under MACRS using 5-year recovery period. The existing washer is expected to have a usable life of five more years. The new washer costs $210,000 and requires $10,000 in installation costs; it has a 5-year usable life and would be depreciated under MACRS using 5-year recovery period. The existing washer can currently be sold for $140,000 without incurring any removal or cleanup costs. To support the increased business resulting from the purchase of the new washer, accounts receivable would increase by $80,000, inventories by $60,000, and accounts payable by $116,000, and these changes are recouped at the end of the project. At the end of five years, the existing washer is expected to have a market value of zero; the new washer would be sold to net $58,000 after removal and cleanup costs and before taxes. The firm pays taxes at a rate of 40% on both ordinary income and capital gains. MACRS 5-year recovery schedule Year 1 2 3 4 5 6 Percentage 20% 32 19 12 12 5 What is the terminal cash flow associated with this project?

Explanation / Answer

Book value at the end of 5th year = 5%*(210000+10000) = 11000 (but actual is =5.76%*220000 = 12672)

Sale price = 58000

tax = 40%*(58000 - 11000) = 18800

Terminal value = 58000 - 18800 = 39200

Working capital = 80000 + 60000 - 116000 = 24000

Total non operating cashflow = 39200 + 24000 = 63200

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.