Question

The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $ 714. The new machine will operate for 3 years and then project will be shut down and all equipment sold. The old machine, which originally cost $ 441, has 2 years of depreciation remaining and a current book value of 22% of the original cost. The old machine has a current market value of $ 185 and should be worth $ 262 at the end of 3 years. The new printing machine could be sold for $ 164 in 3 years. If we buy the new machine our inventory levels will go from $600 to $900. Inventory levels will return to normal at the end of the project. Our annual sales will go from $15,000 to $20,000. Target's corporate tax rate is 25 percent. Both machines are in the 3-year MACRS class, with rates of 33% for year 1, 45% for year 2, 15% for year 3, and 7% for year 4. What are the expected Terminal Cash Flows at the end of year 3, if we replace the old printing machine? This could be a cash inflow or a cash outlay. Be sure to use the - sign should this be a cash outflow. Show your answer to the nearest $.01 Do not use the $ symbol in your answer.

Answer 1

1)	Sale value of new machine at EOY 3 =	164.00
	Book value of new machine = 714*7% =	49.98
	Gain on sale	114.02
	Tax at 25%	28.51
	Net cash inflow on new machine		135.50
2)	Sale value of old machine at EOY 3 =	262.00
	Book value of old machine	0.00
	Gain on sale	262.00
	Tax at 25%	65.50
	Net cash inflow lost on old machine		-196.50
3)	Release of NWC		300.00
4)	Net terminal cash inflow at EOY 3		239.00	(Answer)