Topsider Inc. is evaluating whether to replace an existing leather-cutting machine with a new machine that has a five-year life. The old machine has current salvage value equal to $3,000; its salvage value in five years is expected to be zero. The net (after-tax) salvage value of the new machine in five years is expected to be $6,000. If the new machine is purchased, Topsider will have to invest $3,520 in its net working capital. Based on this information, what is the new machine's terminal cash?
A)$6,000
B)$3,520
C)$9,520
D)$7,000
E)$3,000

Question

Quizplus · Accepted Answer

The terminal cash flows for the project are the net of the after-tax proceeds from the sale of the new machine and the release of net working capital.

Terminal cash flow = After-tax salvage value of new machine + Release of net working capital
Terminal cash flow = $6,000 + (-$3,520) 
Terminal cash flow = $2,480

Therefore, the new machine's terminal cash is $2,480. The best choice is option C.