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.

terminal cash flow=$132,000

Explanation:

The depreciable cost using straight line depreciation can be expressed as;

depreciable cost=acquisition cost-salvage value

where;

acquisition cost=$21,000,000

salvage value=$0

replacing;

depreciable cost=(21,000,000-0)=$21,000,000

Annual depreciable cost=depreciable cost/life

where;

depreciable cost=$21,000,000

life=15 years

replacing;

annual depreciable cost=21,000,000/15=$1,400,000

Accumulated depreciation at point of sale=annual depreciable cost×service life=(1,400,000×8)=$11,200,000

Book value=acquisition cost-accumulated depreciation

book value=21,000,000-11,200,000=$9,800,000

At disposal;

net gain=selling price-book value

net gain=10,000,000-9,800,000=$200,000

terminal cash flow=net gain from disposal-tax

terminal cash flow=200,000-(34% of 200,000)=200,000-68,000

terminal cash flow=$132,000