Terminal cash flow—Various lives and sale prices Looner Industries is currently analyzing...

Terminal cash flow—Various lives and sale prices Looner Industries is currently analyzing the purchase of a new machine that costs $160,000 and requires $20,000 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $30,000 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a 5-year recovery period (see Table 4.2 for the applicable depreciation percentages) and expects to sell the machine to net $10,000 before taxes at the end of its usable life. The firm is subject to a 40% tax rate.

a. Calculate the terminal cash flow for a usable life of (1) 3 years, (2) 5 years, and (3) 7 years.

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b. Discuss the effect of usable life on terminal cash flows using your findings in part a.

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c. Assuming a 5-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,000 or (2) $170,000 (before taxes) at the end of 5 years.

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d. Discuss the effect of sale price on terminal cash flow using your findings in part c.

TABLE 4.2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes