Arnold is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the terminal cash flows is

Question

Arnold is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase:  The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the terminal cash flows is

Quizplus · Accepted Answer

To calculate the present value of terminal cash flows, we need to consider the salvage value of the new machine and the sales price of the old machine, both of which occur at the end of the fifth year.

Salvage value of the new machine = $0 (since it has a life of 5 years)

Sales price of the old machine = $15,000

To calculate the present value of terminal cash flows, we need to discount these cash flows back to present value using the discount rate of 12%, as follows:

Present value of terminal cash flows = ($0 + $15,000) / (1 + 0.12)^5 
= $4,536.31 (rounded to the nearest dollar)

Therefore, the best choice is B with an explanation that we have calculated the present value of terminal cash flows to be $4,536.

Arnold Is Acquiring a New Machine with a Life of 5