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Liberty Services is now at fourth year of a project with five year-life. The project has...

Liberty Services is now at fourth year of a project with five year-life. The project has brought $10,000 of incremental cash operating income every year. No salvage value is expected and annual depreciation expense is $4,500. The equipment originally cost $22,500, of which 80% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. what would be the end-of life cash flow (terminal cash flow)? $ 6,000 $13,200 $15,850

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Answer #1

Depreciated value of asset = 80% * 22500 = $18000

Book Value of asset = $22500 - $18000 = $4500

Sale Price of asset = $6000

Gain on Sale of asset = $6000 - $4500 = $1500

Tax of gain on sale of asset = 40% * $1500 = $600

Net cash from sale of asset = $6000 - $600 = $5400

Incremental cash Income = $10000

Incremental Net Income = Incremental Cash Income - Depreciation

Incremental Net Income = $10000 - $4500 = $5500

Tax = 40% * $5500 = $2200

Net Income = $5500 - $2200 = $3300

Incremental after tax cash flow = $3300 + $4500 = $7800

Hence, Terminal cash flow = Incremental after tax cash flow + Net cash from sale of asset

= $7800 + $5400 = $13200

End of life cash flow is $13200

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