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(Solved): An increasingly popular trend in mountain biking is to remove the chain and coast down the mountain. ...


An increasingly popular trend in mountain biking is to remove the chain and coast down the mountain. This has reduced demand for crank sets, chains, and derailleurs. As a result, Endo Mountain Bikes Inc. is shutting down its bicycle propulsion plant. It purchased the plant 2 years ago for $300,000. It can sell the plant today for $100,000. The plant had a MACRS depreciable life of 5 years with depreciation rates of 20% and 32% in the first two years. When the plant is closed, Endo’s net working capital will decrease by $50,000. EBITDA in the final year is $250,000. Endo’s tax rate is 35%. What are the terminal year cash flows? Round your answer to the nearest dollar.



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To calculate the terminal year cash flows, we must take the following factors into account:

1. Tax savings from selling the plant: The plant cost $300,000 and may now be sold for $100,000, resulting in a $200,000 loss. Endo's taxable income can be offset by this loss, resulting in a tax savings of $70,000 (35% of $200,000).

2. The plant's after-tax salvage value is the amount Endo will earn after selling the plant and paying taxes on the gain. The profit is the difference between the sale price ($100,000) and the remaining book value of the facility. We must compute the book value using the MACRS depreciation rates since the plant has been depreciated using MACRS. The book value at the end of the end of year 2 is:
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