1. **State the problem:** Calculate the terminal year cash flows for the equipment acquisition considering purchase cost, modifications, depreciation, salvage value, working capital, tax, and savings. 2. **Identify given data:** - Equipment price = 140000 - Modification cost = 30000 - Total initial cost = 140000 + 30000 = 170000 - MACRS 3-year class depreciation rates: Year 1 = 33%, Year 2 = 45%, Year 3 = 15%, Year 4 = 7% - Salvage value after 3 years = 60000 - Increase in net operating working capital = 8000 - Annual savings before tax = 50000 - Tax rate = 40% 3. **Calculate accumulated depreciation after 3 years:** $$\text{Depreciation Year 1} = 170000 \times 0.33 = 56100$$ $$\text{Depreciation Year 2} = 170000 \times 0.45 = 76500$$ $$\text{Depreciation Year 3} = 170000 \times 0.15 = 25500$$ $$\text{Total depreciation after 3 years} = 56100 + 76500 + 25500 = 158100$$ 4. **Calculate book value at end of year 3:** $$\text{Book value} = \text{Initial cost} - \text{Accumulated depreciation} = 170000 - 158100 = 11900$$ 5. **Calculate gain on sale:** $$\text{Gain} = \text{Salvage value} - \text{Book value} = 60000 - 11900 = 48100$$ 6. **Calculate tax on gain:** $$\text{Tax on gain} = 48100 \times 0.40 = 19240$$ 7. **Calculate after-tax salvage value:** $$\text{After-tax salvage} = 60000 - 19240 = 40760$$ 8. **Calculate annual after-tax savings:** $$\text{After-tax savings} = 50000 \times (1 - 0.40) = 30000$$ 9. **Calculate terminal year cash flow:** Terminal year cash flow includes: - After-tax savings for year 3 = 30000 - After-tax salvage value = 40760 - Recovery of net working capital = 8000 $$\text{Terminal year cash flow} = 30000 + 40760 + 8000 = 78760$$ **Final answer:** The terminal year cash flow is $78760.