AFB Corp.needs to replace an old lathe with a new,more efficient model.The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.(The old machine is being depreciated on a straight-line basis over a ten-year useful life.)The new lathe costs $100,000.It will cost the company $10,000 to get the new lathe to the factory and get it installed.The old machine will be sold as scrap metal for $2,000.The new machine is also being depreciated on a straight-line basis over ten years.Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year.AFB's marginal tax rate is 40%.Additional working capital of $3,000 is required to maintain the new machine and higher sales level.The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life.What is the project's terminal cash flow?

Question

Quizplus · Accepted Answer

The terminal cash flow is calculated by considering the salvage value of the new lathe, the recovery of working capital, and the tax implications of the salvage value. The salvage value of the new lathe is $5,000. The additional working capital of $3,000 is recovered at the end of the project. There are no taxes on the salvage value since it equals the book value at the end of the project (both being $5,000, assuming straight-line depreciation over ten years). Therefore, the terminal cash flow is the sum of the salvage value and the recovered working capital: $5,000 + $3,000 = $8,000. However, the correct calculation should consider any tax implications if there were any, but in this case, since the salvage value equals the book value, there are no taxes due on the salvage. The correct answer is the sum of the salvage value and the recovered working capital without needing to adjust for taxes, which was incorrectly calculated in the initial explanation. The correct terminal cash flow is indeed $8,000, making the correct choice D, not C as initially stated.

AFB CorpNeeds to Replace an Old Lathe with a New,more Efficient