Looner Industries is currently analyzing the purchase of a new machine that costs $160,000 and requires $20,000 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $30,000 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a 5-year recovery period and expects to sell the machine to net $10,000 before taxes at the end of its usable life. The firm is subject to a 40% tax rate.
a. Calculate the terminal cash flow for a usable life of
(1) 3 years,
(2) 5 years, and
(3) 7 years.
b. Discuss the effect of usable life on terminal cash flows using your findings in part a.
c. Assuming a 5-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,000 or
(2) $170,000 (before taxes) at the end of 5 years.
d. Discuss the effect of sale price on terminal cash flow using your findings in part c.