Looner Industries is currently analyzing the purchase of a new machine that costs $161,000 and requires $19,700 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,800 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a five-year recovery period for the applicable depreciation percentages) and expects to sell the machine to net $10,100 before taxes at the end of its usable life. The firm is subject to a 21% tax rate. a. Calculate the terminal cash flow for a usable life of (1) three years, (2) five years, and (3) seven years. b. Discuss the effect of usable life on terminal cash flows using your findings in part a. c. Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,035 or (2) $170,200 (before taxes) at the end of five years. d. Discuss the effect of sale price on terminal cash flow using your findings in part c.
Looner Industries is currently analyzing the purchase of a new machine that costs $161,000 and requires $19,700 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,800 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a five-year recovery period for the applicable depreciation percentages) and expects to sell the machine to net $10,100 before taxes at the end of its usable life. The firm is subject to a 21% tax rate. a. Calculate the terminal cash flow for a usable life of (1) three years, (2) five years, and (3) seven years. b. Discuss the effect of usable life on terminal cash flows using your findings in part a. c. Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $9,035 or (2) $170,200 (before taxes) at the end of five years. d. Discuss the effect of sale price on terminal cash flow using your findings in part c.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Terminal Cash Flow / Need Excel Formulas
Looner Industries is currently analyzing the purchase of a new machine that costs $161,000 and requires $19,700
in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,800
to support the expanded level of operations. The firm plans todepreciate the machine under MACRS using a five-year recovery period for the applicable depreciation percentages) and expects to sell the machine to net $10,100
before taxes at the end of its usable life. The firm is subject to a 21% tax rate.
Looner Industries is currently analyzing the purchase of a new machine that costs $161,000 and requires $19,700
in installation costs. Purchase of this machine is expected to result in an increase in net working capital of $29,800
to support the expanded level of operations. The firm plans to
before taxes at the end of its usable life. The firm is subject to a 21% tax rate.
a. Calculate the terminal cash flow for a usable life of (1) three years, (2) five years, and (3) seven years.
b. Discuss the effect of usable life on terminal cash flows using your findings in part a.
c. Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1)
$9,035 or (2) $170,200 (before taxes) at the end of five years.
d. Discuss the effect of sale price on terminal cash flow using your findings in part c.
Transcribed Image Text:(Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)
Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
Recovery year
1
10 years
10%
18%
14%
12%
9%
8%
7%
6%
6%
6%
4%
100%
100%
100%
100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while
retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual
unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year
convention.
2345
2
6
789
9
10
11
Totals
Percentage by recovery year*
5 years
20%
3 years
33%
45%
15%
7%
32%
19%
12%
12%
5%
7 years
14%
25%
18%
12%
9%
9%
9%
4%
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VIEWStep 4: b. The effect of usable life on terminal cash flows:
VIEWStep 5: c. Calculate the terminal cash flow if the machine were sold:
VIEWStep 6: d. The effect of sale price on terminal cash flow
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