a corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. the proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $15,000. the machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year macrs. net working capital is expected to decline by $5,000. the firm has a 40 percent tax rate on ordinary income and long-term capital gain. the terminal cash flow is .

Terminal cash flow is final cash flow of net cash inflows and outflows at the end of the projects. Terminal cash flow includes after-tax cash flow from disposal activity and any working capital changes.

From the case, we know that:

Resell price = $15,000

Original pruchase price = $80,000

Installation cost = $20,000

Usable life = 5 years

Depreciation method = SL

NWC decline = $5,000

Tax rate = 40%

Terminal cash flow?

First, we have to find the salvage value of the machine. By using straight-line method, we know that the machine's annual depreciation is:

Machine original value = original purchase price + installation cost

Machine original value = $80,000 + $20,000

Machine original value = $100,000

Annual depreciation = Machine original value : useful life

Annual depreciation = $100,000 : 5

Annual depreciation = $20,000

Assuming that the machine is being resold in year 5, the salvage value of the machine equals to $0 (zero).

Hence, the terminal cash flow is:

Actual proceeds received on disposal: $15,000

Book value on disposal: $0

Tax rate on disposal: 40%

Tax on disposal (40% x $15,000): $6,000

After tax proceeds on disposal : $21,000

Any change in working capital : $(5,000)

Terminal cash flows: $16,000

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