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14 August, 23:55

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?

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  1. 15 August, 00:06
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    The correct answer is $263,200.

    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
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