Question

Not yet answered Question 15 Marked out of 2.50 P Flag question You have been asked to evaluate a proposed investment in new equipment. The equipment's price is $30,000, and will be depreciated straight-line over a three year life. Purchase of the new equipment would require an increase in net operating working capital of $5260. The new equipment is expected to be used for 3 years and then be sold for $19914.4. The firm's marginal tax rate is 30%. Calculate the terminal cash flow. Please state your answer in total whole dollars without commas and no dollar signs. e.g. $50,000.20 should be entered as 50000 Answer:

Answer 1

Solution :-

Sale value of equipment at the end of 3 years = $19,914.4

As the equipment has been depreciated to zero over its 3 year life, so,

Book value at the end of 3 years = 0

Tax rate = 30% or 0.3

After tax salvage value =

= Sale value - [ tax rate ( sale value at the end of 3 years - book value at the end of 3 years) ]

= $19,914.4 - [ 0.3 * ($19,914.4 - 0) ]

= $ 19,914.4 - $5,974.32

= $13,940.08

Recovery of working capital = $5,260

Terminal cash flow = After tax salvage value + Recovery of working capital

= $13,940.08 + $5,260

= $19,200.08

So, the answer is $19200 (approx)