Question

Ken Smith wants to start a deck and fence company called Heritage Design. Ken will run the business for three years and then retire. Assume that his investment outlays will occur immediately and all operating cash flows occur at​ year-end with the first​ year's cash flows occurring one year from now. Ken plans to buy two​ pick-up trucks at a cost of $ 25,800 per vehicle. He also expects to purchase $ 20,600 worth of tools and equipment. The trucks and the equipment are classified as a​ 5-year property. Ken expects that he will have to carry a lumber inventory of $ 25,200. At the end of three​ years, Ken expects that he will be able to sell each of the trucks for $ 5,000​, but he expects that the tools and equipment will be worthless. The corporate tax rate is 30 %. What are the terminal cash flows​ (the terminal year cash flows not including the operating cash​ flows)?
The total cost of the​ trucks, tools and equipment​ (initial investment) is

Answer 1

Total cost of trucks and tools/equipment = cost of trucks + cost of tools

= 25800*2 + 20600

=$72200

Salvage value after tax of the trucks =

Purchase price = 25800*2 = 51600

Less :Depreciation = 36739

Year 1 = 20% = 10320

Year 2 = 32% = 16512

Year 3 = 19.2% = 9907.20

Book value = 14860.8

Selling price = 10000

Hence Loss = -4860.8

Tax = 30% = 1458.24

Net Salvage = 10000+1458.24 = $11458.24

Terminal year cash flow =net salvage + working capital recovery

= 11458.24+ 25200

= $36658.24