A corporation is evaluating the relevant cash flows for a capital budgeting decision and mustestimate the terminal cash flow. The proposed machine will be disposed of at the end of its usablelife of five years at an estimated sale price of $15,000. The machine has an original purchase price of$80,000, installation cost of $20,000, and will be depreciated using a 30% CCA rate. The firm has a40 percent tax rate on ordinary income. The terminal cash flow is ___________. Assume the asset pool is closed at the end of the project.
A) $17,163.40
B) $14,010.12
C) $26,945.01
D) $24,007.11

Question

Quizplus · Accepted Answer

The terminal cash flow is the sum of the salvage value and the tax savings on the depreciation recapture. The salvage value is $15,000. The depreciation recapture is the difference between the original purchase price and the salvage value, which is $80,000 - $15,000 = $65,000. The tax savings on the depreciation recapture is $65,000 * 0.40 = $26,000. Therefore, the terminal cash flow is $15,000 + $26,000 = $41,000.

A Corporation Is Evaluating the Relevant Cash Flows for a Capital