Question

milton industries wants to purchase new equipment that has a quoted price of $1,000,000. milton estimates an additional cost of $85,000 will be needed today to have the equipment modified, shipped, and installed. the purchase of this additional equipment will require milton to invest an estimated $55,000 in net working capital upfront, and this investment should be recovered when milton sells the equipment. if purchased, the equipment will be employed for a total of five years, and then sold for an estimated $640,000. the equipment will be depreciated straight-line on a five-year schedule. during each of the years that the equipment is in service, it is expected to boost milton’s sales revenue by $298,000 though annual operating costs (other than depreciation) are also expected to be higher, to the extent of $74,000. milton faces a marginal tax rate of 25%, and its cost of capital is 7.25%. the total net cash flow from this project for the terminal year (year 5) is:

$757,250

$709,250

$740,150

$782,750

$785,250

Answer 1

Answer : $757,250

Calculation :

	Year 5
Revenue	298000
Less :Operating Cost ( 90000 + 20000 + 10000 )	74000
Less : Depreciation [ (1,000,000 +85,000) / 5 ] = 217000	217000
Earning before taxes	7000
Less :Taxes @ 35%	1750
Earnings After Taxes	5250
Add : Depreciation (120,000 / 5)	217000
Plus : Salvage Value	640000
Less : tax on salvage @ 35%	160000
Plus : Recapture of NWC	55000
Net Cash Flows for terminal year (Year 5)	757250