New high-speed washer to replace the existing washer

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Reference no: EM132067234

Slow-Way Truck Wash is contemplating the purchase of a new high-speed washer to replace the existing washer. An analyst has already figured the initial investment and the incremental operating cash inflows, but wishes to get your help with calculating the terminal value of the proposed replacement.

The existing washer was purchased two years ago at an installed cost of $120,000; it was being depreciated under MACRS using a 5-year recovery period. The existing washer is expected to have a usable life of five more years. The existing washer can currently be sold for $65,000 without incurring any removal or cleanup costs. At the end of five years, the existing washer is expected to have a market value of zero.

The new washer costs $210,000 and requires $10,000 in installation costs; it has a 5-year usable life and would be depreciated under MACRS using a 5-year recovery period. At the end of five years, the new washer would be sold to net $18,000 after removal and cleanup costs and before taxes.

Slow-Way pays taxes at a rate of 40 percent on both ordinary income and capital gains.

DETERMINE THE TERMINAL VALUE (also called terminal cash flow) EXPECTED AT THE END OF YEAR 5 FROM THE WASHER REPLACEMENT.

Reference no: EM132067234

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