PDF Corp.needs to replace an old lathe with a new,more efficient model.The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.(The old machine is being depreciated on a straight-line basis over a ten-year useful life.)The new lathe costs $100,000.It will cost the company $10,000 to get the new lathe to the factory and get it installed.The old machine will be sold as scrap metal for $2,000.The new machine is also being depreciated on a straight-line basis over ten years.Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year.PDF's marginal tax rate is 40%.Additional working capital of $3,000 is required to maintain the new machine and higher sales level.The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life.What is the project's terminal cash flow?

Question

Quizplus · Accepted Answer

The terminal cash flow includes the salvage value of the new lathe ($5,000), the recovery of additional working capital ($3,000), and the tax effect on the sale of the new lathe. The book value at the end of 10 years is $0, so the tax on the gain is $5,000 * 40% = $2,000. Therefore, the terminal cash flow is $5,000 + $3,000 - $2,000 = $6,000.

PDF CorpNeeds to Replace an Old Lathe with a New,more Efficient