Question

Golddex Corporation has decided to sell some old equipment to make room for a new project. The salvage value of the equipment is $220,000. The firm would be able to recover $60,000 in working capital when the equipment is sold. Their tax rate is 21%. The old equipment has a book value of $140,000. What is the terminal cash flow?

Answer 1

The correct answer is $263,200.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Salvage value =$220,000

Working capital = $60,000

Book value = $140,000

Tax rate = 21%

So, Gain on disposal = Salvage value - Book value

= $220,000 - $140,000 = $80,000

Now, Tax paid on gain on disposal value = Gain on disposal × tax rate

= $80,000 × 21% = $16,800

So, Salvage value after tax = Salvage value - Tax paid on gain on disposal value

= $220,000 - $16,800

= $203,200

So, we can calculate the terminal cash flow by using following formula:

Terminal cash flow = Salvage value after tax + Working value

= $203,200 + $60,000

= $263,200