Question

Your company is considering a machine that will cost $ 6,407 at Time 0 and which can be sold after 3 years for $ 344 . To operate the machine, $ 817 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $ 1,204 /year for 3 years; variable operating costs (excluding depreciation) will be 56 percent of sales. Operating cash inflows will begin 1 year from today (at Time 1). The machine is in the 3-year MACRS class. The MACRS class has depreciation of 33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4. The company has a 39 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 percent cost of capital. Inflation is zero. What are the terminal cash flows associated with ending this project

Answer 1

Answer:

The answer is "1201.7511".

Explanation:

Formula:

$\text{The terminal value at End value of year 3 }= \text{reserve value} + \text{total capital of work}- \text {T(reserve value - book value at the end of 3 years) }$

In this issue, maximum throughput capital is inventoried  total assets at year-end 3 = 7% of the initial rate.  It uses 7% because a computer is a MACRS class which takes three years. Because as the computer is now down 93% (33% for the first year, 45% for the second year, and 15% for the third year)

$\to \text {Book value} = 0.07 \times \ \ 6,407$

                      $= 448.49$

The rescue value is $344 and the stock of $817.  

Financial rate = 39%  

Now include these all values in the above described marginal working capital formula,  

Middle of year 3 terminal value:

$=344 + 817 - 0.39 \times (344 - 448.49)\\\\= 1161-0.39 \times(-104.49) \\\\=1161+ 40.7511\\\\= 1201.7511$