Lasalle Industries is considering the purchase of a new machine that will cost $250,000,plus an additional $10,000 to ship and install.The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method.The machine is expected to have a salvage value of $30,000 at the end of year five.LaSalle's income tax rate is 40%.The additional net working capital from this project of $50,000 is expected to return to its pre-project level upon termination.What is the non-operating terminal cash flow of the machine?

Question

Quizplus · Accepted Answer

Terminal cash flow = salvage value - tax on salvage value + return of net working capital

Salvage value = $30,000
Tax on salvage value = (salvage value - book value) x tax rate
Book value at end of year 5 = $0 (due to straight-line depreciation)
Tax on salvage value = ($30,000 - $0) x 0.4 = $12,000
Return of net working capital = $50,000

Therefore, terminal cash flow = $30,000 - $12,000 + $50,000 = $68,000

Option C is the correct answer.

Lasalle Industries Is Considering the Purchase of a New Machine