The Mountain Jam Company purchased a machine 5 years ago for $70,000.It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7^th year.The old machine can be sold today for $60,000.A new machine can be purchased for $69,300.It has a 2-year life and is expected to reduce operating expenses by $50,000 per year.Sales aren't expected to change.After 2 years,the new machine can be sold for $20,000.The company uses the straight-line method to calculate depreciation for both machines.The tax rate is 40%.What are the terminal year cash flows?

Question

Quizplus · Accepted Answer

Terminal Cash Flows = OCF + (Net salvage from new) + (Decrease in net working capital) - (Net salvage from old)
Incremental Depreciation = (69,300/2) - (70,000/7) = $24,650
NOPAT = (50,000 - 24,650) × (1 - 0.40) = $15,210
OCF = 15,210 + 24,650 = $39,860
Decrease in Net Working Capital = $0
Net Salvage value = S - Tax on Sale
Tax on sale = T × (S - B)
ADepr = 2 × (69,300/2) = $69,300 11ea7fdb_fc88_2f0d_a768_0348d9934c4b_TB2902_11 = 69,300 - 69,300 = 0
Tax on Sale = 0.4 × (20,000 - 0) = $8,000
Net Salvage = 20,000 - 8,000 = $12,000
Terminal Cash Flows = 39,860 + 12,000 + 0 - 0 = $51,860

The Mountain Jam Company Purchased a Machine 5 Years Ago