The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons.Although the machine being considered will not produce any increase in sales revenues,it will result in the before-tax reduction of labour costs by $200,000 per year.The machine has a purchase price of $250,000,and it would cost an additional $10,000 to install the machine.In addition,to operate this machine,inventory must be increased by $15,000.The machine is categorized as 10-year property.After 2 years,it can be sold for $150,000.The tax rate is 34% and the cost of capital is 15%.Operating expenses are expected to increase by 2.5%.What are the terminal year cash flows?
MACRS Depreciation Rates

Question

Quizplus · Accepted Answer

11ea7fdb_fc7f_7c43_a768_d797289f078a_TB2902_00 Terminal Cash Flows = OCF + (Decrease in net working capital) + (Net salvage)
EBIT = Revenues - Expenses - Depr
Revenues = $0
Expenses = -$200,000
Depr = 0.18 × 260,000 = $46,800
EBIT = -(-200,000) - 46,800 = $158,200
NOPAT = EBIT × (1 - T)
NOPAT = 158,200 × (1 - 0.34) = $104,412
OCF = NOPAT + Depreciation
OCF = 104,412 + 46,800 = $151,212
Net Salvage = Salvage - Tax on Sale
Net Salvage = Salvage - T × (Salvage - Book Value)
Net Salvage = $150,000 - ($150,000 - $187,200) × 0.34 = $162,648
Terminal year CF = $151,212 + $15,000 + $162,648 = $328,860

The Munsell Colour Company Is Considering the Purchase of a New