Question

"Eastern Corporation has $21,000,000 in equipment that has a 15 year class life. The equipment is 8 years old. Eastern is selling the equipment for $10,000,000. Eastern uses simplified straight line depreciation (zero salvage value) and has a marginal tax rate of 34%. What is the terminal cash flow? Assume no working capital."

Answer 1

Answer:

terminal cash flow $932,000

Explanation:

21,000,000/15 = 1,400,000

1,400,000 x 8 = 11,200,000

Net Book Value: 21,000,000 - 11,200,000 = 9,800,000

Sale                                                                10,000,000

Gain                                                                   200,000

We must pay taxes for the gain:

200,000 x .34 = 68,000

terminal cash flow: proceeds - taxes = 10,000,000 - 68,000 = 932,000