Crighton Industries is considering the purchase of a new machine that will cost $250,000,plus an additional $10,000 to ship and install.The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method.The machine is expected to have a salvage value of $30,000 at the end of year five.Crighton's income tax rate is 40%.The additional net working capital from this project of $50,000 is expected to return to its pre-project level upon termination.What is the non-operating terminal cash flow of the machine?

Question

Quizplus · Accepted Answer

The non-operating terminal cash flow includes the salvage value of the machine and the recovery of net working capital, adjusted for taxes. The salvage value is $30,000, and the net working capital recovery is $50,000. The tax on the salvage value is 40% of the difference between the salvage value and the book value (which is zero due to full depreciation), so tax is $12,000. Thus, the terminal cash flow is $30,000 - $12,000 + $50,000 = $68,000.

Crighton Industries Is Considering the Purchase of a New Machine