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Builtrite is considering purchasing a new machine that would cost $60,000 and the machine would be...


Builtrite is considering purchasing a new machine that would cost $60,000 and the machine would be depreciated (straight line) down to $0 over its five year life. At the end of five years it is believed that the machine could be sold for $15,000. The machine would increase EBDT by $42,000 annually.  Builtrite’s marginal tax rate is 34%.

What is the TCF associated with the purchase of this machine?

$5,100

$7,500

$0

$9,900
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Answer #1

The Terminal Cash Flow (TCF) associated with the purchase of this machine

The Terminal Cash Flow (TCF) associated with the purchase of this machine is the after-tax salvage value of the machine at the end of 5 years

Terminal Cash Flow (TCF) = Salvage Value x (1 – Tax Rate)

= $15,000 x (1 – 0.34)

= $15,000 x 0.66

= $9,900

“Therefore, the Terminal Cash Flow (TCF) associated with the purchase of this machine would be $9,900”

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