Question

Veridian Dynamics is considering the purchase of a new cloning machine, which will cost $120 million plus an addition $12 million to ship and install. The new machine will replace the existing machine, which has zero book value and could be sold today for $20 million. The new machine has a useful life of 4 years, and will be depreciated to zero using the straight line method. The new machine will require $5 million worth of spare parts to be purchased initially and held in inventory for the next 4 years to make sure the machine operates smoothly. These spare parts will be sold at the end of 4 years and the entire $5 million will be recaptured. The new machine will increase sales by $120 million per year, increase cost of goods sold by $60 million per year, and decrease operating expenses by $8 million pear year over the next 4 years. Veridian Dynamics expects to sell the new machine for $60 million at the end of 4 years. Veridian Dynamics's income tax rate is 20% and its cost of capital is 20%. What is the Terminal Cash Flow? (in $ millions) Select one: O $5 O b. 560 O c $48 Od 553

Answer 1

After tax salvage value of new machine = 60*(1-20%) =	$            48.00	million
Recapture of cost of inventory	$              5.00	million
Terminal cash flow	$            53.00	million