Your company is considering the replacement of an old delivery van with a new one that is more efficient.The old van cost $40,000 when it was purchased 5 years ago.The old van is being depreciated using the simplified straight-line method over a useful life of 8 years.The old van could be sold today for $7,000.The new van has an invoice price of $80,000,and it will cost $6,000 to modify the van to carry the company's products.Cost savings from use of the new van are expected to be $28,000 per year for 5 years,at which time the van will be sold for its estimated salvage value of $18,000.The new van will be depreciated using the simplified straight-line method over its 5-year useful life.The company's tax rate is 35%.Working capital is expected to increase by $5,000 at the inception of the project,but this amount will be recaptured at the end of year five.What is the terminal cash flow?

Question

Quizplus · Accepted Answer

The terminal cash flow includes several components: the salvage value of the new van, the recapture of working capital, and the tax effects due to the sale of the van. The salvage value of the new van is $18,000. The working capital of $5,000 is recaptured. The book value of the new van at the end of year 5 is zero because it has been fully depreciated over its 5-year useful life (straight-line depreciation of $80,000 / 5 years = $16,000 per year for 5 years equals a total depreciation of $80,000, leaving a book value of $0). Therefore, the entire sale amount of $18,000 is a gain, which is taxed at 35%. The tax on the sale is $18,000 * 35% = $6,300. The net cash from the sale after taxes is $18,000 - $6,300 = $11,700. Adding the recaptured working capital of $5,000 gives a total terminal cash flow of $11,700 + $5,000 = $16,700.

Your Company Is Considering the Replacement of an Old Delivery