Question

ANSWER ASAP!

23) PDF Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5.000. (The old machine is being depreciated on a MACRS depreciationbasis over a ten-year useful life. The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on MACRS depreciation basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12.000 per year. PDF's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for 55.000 at the end of the project's ten-year life. What is the project's terminal cash flow?

Answer 1

Answer:

Project's terminal cash flow = $7,443.20

Working:

Installed cost of new machine =$100,000 + $10,000 = $110,000

The depreciation schedule is as follows:

Installed Cost of Machine = $110,000 Year Depreciation Book Value 1 MACRS 10 year Rates 10.00% 18.00% 14.40% 11.52% 9.22% 7.37% 6.55% 6.55% 6.56% 6.55% 3.28% $11,000.00 $19,800.00 $15,840.00 $12,672.00 $10,142.00 $8,107.00 $7,205.00 $7,205.00 $7,216.00 $7,205.00 $3,608.00 Accumulated Depreciation $11,000.00 $30,800.00 $46,640.00 $59,312.00 $69,454.00 $77,561.00 $84,766.00 $91,971.00 $99,187.00 $106,392.00 $110,000.00 $99,000.00 $79,200.00 $63,360.00 $50,688.00 $40,546.00 $32,439.00 $25,234.00 $18,029.00 $10,813.00 $3,608.00 $0.00 9 11

As we observe from above table:

Book value of new machine at the end of Year 10 = $3,608

Salvage value = $5000

Tax on gain = (5000 - 3608) * 40% = $556.80

Salvage value net of tax = 5000 - 556.80 = $4443.20

Project's terminal cash flow = Salvage value net of tax + Recovery of working capital

= $4443.20 + $3,000

= $7443.20

Project's terminal cash flow = $7,443.20