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 $2,000. The machine has an original purchase price of$80,000, installation cost of $20,000, and will be depreciated using a 20% 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) $15,945.60
B) $5,887.20
C) $16,200.00
D) $17,801.10

Question

Quizplus · Accepted Answer

The terminal cash flow is the cash flow that occurs at the end of the project's life. In this case, the terminal cash flow is the sale price of the machine minus the book value of the machine. The book value of the machine is the original purchase price minus the accumulated depreciation. The accumulated depreciation is the depreciation expense multiplied by the number of years the machine has been in use. In this case, the accumulated depreciation is $80,000 x 20% x 5 = $80,000. Therefore, the book value of the machine is $80,000 - $80,000 = $0. The terminal cash flow is therefore $2,000 - $0 = $2,000.

A Corporation Is Evaluating the Relevant Cash Flows for a Capital