Question

Milan is looking to expand its eraser offerings. To do so, they will need to purchase equipment costing $300.300. The equipment is to be depreciated straight line to zero over the 3 year life of the equipment. At this point, it will be sold for 6% of the initial cost. If the tax rate is 23. what is the terminal cash flow associated with the equipment? (Round your answer to the nearest dollar ex: 12.345 instead of 12,345.06)

Answer 1

Solution :

Statement showing calculation of Terminal Cash Inflow:

Sl.No.	Particulars	Amount
1.	Sale value of the Asset = 6 % of Original cost = 6 % of $ 300,300 = 0.06 * $ 300,300 = $ 18,018	$ 18,018
2.	Less : Book value of the Asset ( Since the asset has been depreciated a 100 %, Book value is equal to zero )	$ 0
3.	Profit on sale of Asset = (1) – (2)	$ 18,018
4.	Tax Rate = 23 % = 0.23	0.23
5.	Tax payable on profit on sale of asset = ( $ 18,018 * 0.23 )	$ 4,144.14
6.	Terminal Cash Inflow = Sale value of asset - Tax payable on profit on sale of asset = $ 18,018 - $ 4,144.14 = (1) - (5 )	$ 13,873.86

                                                                                         

Thus the Terminal Cash Inflow is = $ 13,873.86

= $ 13,874 ( when rounded off to the nearest dollar )