ABC purchased a new machine for $2,575,000.  Required modifications
will cost $375,000.  ABC will need to invest $75,000 for additional
inventory.  The machine has an IRS approved useful life of 7 years; it
is presumed to have no salvage value.  It will only be operated for 3
years, after which it will be sold for $600,000.  ABC plans to
depreciate the machine be using the straight-line method.  Assume that
the firm's tax rate is 40%.  What is the temination cash flow from the
machine in year 3?
a)$600,000
b)$1,109,286
c)$1,298,000
d)$879,200

Hello k9queen!!

TERMINATION CASH FLOWS = income from the sale +/- tax effect +/-
recovery of net working capital ;

Remember that in the "Tax effect" term, the ATSV (After Tax salvage
Value) is involved.
(Please see Question ID: 159512 and its clarification)
http://answers.google.com/answers/main?cmd=threadview&id=159512 

Then
TERMINATION CASH FLOWS = TCF = ATSV +/- Recovery of NWC . 

In this case the income from the sale is $600,000 .

The depreciation per year for the new machine is 
D = ($2,575,000 + $375,000)/7 = $2,950,000/7 = $421,428.57 .
After 3 years the total depreciation is 
Dt = $421,428.57 * 3 = $1,264,286 .
The book value of the machine is 
BV = $2,950,000 - $1,264,286 = $1,685,714 .

ATSV = $600,000 - ($600,000 - $1,685,714)*0.40 =
     = $600,000 - (-$1,085,714)*0.40 = $1,034,286 .


The recovery of NWC is $75,000, then

TCF = $1,034,286 + $75,000 = $1,109,286 .

The correct answer is b).

Hope this helps.
If you need a clarification, please post a request for it.

Best Regards.
livioflores-ga

Please answer my other questions posted!