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Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase:

Cost of new machine Annual cost savings in cash expenses Terminal value Maintenance required in the 4th year Book value of th

The new machine would replace an old fully-amortized 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 amortization on all machines (ignore the half-year convention). Note: some amounts are rounded.


What is the present value of the terminal value (after tax)? Round to the nearest dollar.

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Answer #1

Solution:

Present value of terminal value = $8,000 * PV factor at 12% for 5th period

= $8,000 * 0.56743

= $4,539

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