Question

ABC Corporation has hired you to evaluate a new FOUR year project for the firm. The project will require the purchase of a $757,000.00 work cell. Further, it will cost the firm $54,200.00 to get the work cell delivered and installed. The work cell will be straight-line depreciated to zero with a 20-year useful life. The project will require new employees to be trained at a cost of $60,500.00. The project will also use a piece of equipment the firm already owns. The equipment has been fully depreciated, but has a market value of $6,800.00. Finally, the firm will invest $11,700.00 in net working capital to ensure the project has sufficient resources to be successful. The project will generate annual sales of $918,000.00 with expenses estimated at 37.00% of sales. Net working capital will be held constant throughout the project. The tax rate is 37.00%. The work cell is estimated to have a market value of $487,000.00 at the end of the fourth year. The firm expects to reclaim 87.00% of the final NWC position. The cost of capital is 14.00%. What is the terminal cash flow for the project?

Answer 1

Solution:-

Calculation of after tax proceeds from sale of work cell:

Depreciation per year= (757,000+54,200)/20= $40,560

Book value at the end of 4 years= (757,000+54,200) - (40,560*4)= $648,960

Loss on sale of work cell= sale proceeds - book value= 487,000 - 648,960= $161,960

Tax savings on loss on sale of work cell= $161,960*tax rate= $161,960*37%= $59,925.2

Therefore, total after tax proceeds on sale of work cell= Sale proceeds + tax savings on sale= 487,000 + 59,925.2= $546,925.2

Calculation of terminal cash flows:

Terminal cash flow= After tax sale proceeds of work cell + recovery of working capital = 546,925.2 + (11,700*87%)= $557,104.2