Problem:
Calculate terminal value. Your company is considering replacing a fully depreciated machine that has a remaining useful life on 10 years with a newer, more sophisticated machine. This new machine will cost $200,000 and will require $30,000 installation costs. It will be depreciated using MACRS 5 year (20%, 32%, 19%, 12%, 12%, and 5%). A $25,000 increase in net working capital will be required to support the new machine. The management plans to evaluate the potential replacement over a 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $15,000 before taxes; the new machine at the end of 4 years will be worth $75,000 before taxes.
Required:
Question: Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a 40% tax rate.
Note: Provide support for your rationale.