Jones Crusher Company is evaluating the proposed acquisition of a new machine. The machine will cost $190,000, and it will cost another $33,000 to modify it for special use by the firm. The machine falls into the MACRS 3-year class, and it will be sold after 3 years of use for $110,000. The machine will require an increase in net working capital of $9,000 and will have no effect on revenues, but is expected to save the firm $90,000 per year in before-tax operating costs, mainly labour. The company's marginal tax rate is 40%. What are the terminal year cash flows? MACRS Depreciation Rates
$$\begin{array} { | c | c | c | }
\hline \text { Year } & \text { 3-Year } & \text { 5-Year } \
\hline 1 & 33.33 \% & 20.00 \% \
\hline 2 & 44.45 \% & 32.00 \% \
\hline 3 & 14.80 \% & 19.20 \% \
\hline
\end{array}$$

Question

Jones Crusher Company is evaluating the proposed acquisition of a new machine. The machine will cost $190,000, and it will cost another $33,000 to modify it for special use by the firm. The machine falls into the MACRS 3-year class, and it will be sold after 3 years of use for $110,000. The machine will require an increase in net working capital of $9,000 and will have no effect on revenues, but is expected to save the firm $90,000 per year in before-tax operating costs, mainly labour. The company's marginal tax rate is 40%. What are the terminal year cash flows? MACRS Depreciation Rates
$$\begin{array} { | c | c | c | } 
\hline \text { Year } & \text { 3-Year } & \text { 5-Year } \
\hline 1 & 33.33 \% & 20.00 \% \
\hline 2 & 44.45 \% & 32.00 \% \
\hline 3 & 14.80 \% & 19.20 \% \
\hline
\end{array}$$

Quizplus · Accepted Answer

The terminal year cash flow includes the after-tax salvage value, the recovery of net working capital, and the tax shield from depreciation. The after-tax salvage value is $110,000 - ($110,000 - $74,860) * 0.40 = $101,944. The recovery of net working capital is $9,000. The tax shield from depreciation is $33,000 * 0.40 = $13,200. Adding these gives $101,944 + $9,000 + $13,200 = $124,144. However, the correct calculation should include the operating cost savings and tax effects, leading to the correct terminal cash flow of $148,820.

Jones Crusher Company Is Evaluating the Proposed Acquisition of a New