Unformatted text preview: 20,000 520,000 530,000 535,000 With the proposed new buses
Expenses (excl. depreciation)
With the present buses
Expenses (excl. depreciation) LG6 8–20 Terminal cash flow—Various lives and sale prices 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 (see Table 3.2 on page 100 for the applicable depreciation percentages) 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 on both ordinary
and capital gains income.
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
c. Assuming a 5-year usable life, calculate the terminal cash flow if the...
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