Question

In: Economics

A service company purchases a fleet of trucks for house calls at a cost value of...

A service company purchases a fleet of trucks for house calls at a cost value of $1 million. At the end of 3 years, the company sells the truck fleet for $612,000. Assuming the company’s gross income is $1.5 million annually with expenses of $1.1 million determine the after-tax cash flows for the 3 years the company owned the fleet. Assume a corporate tax rate of 21% and use the appropriate MACRS depreciation for the truck. Assume that depreciation recapture and depreciation loss is subject to the same 21% tax rate and ignore sales tax for purchasing and selling the truck.

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Solutions

Expert Solution

Answer:

Given that:

A service company purchases a fleet of trucks for house calls at a cost value of $1 million.

Calculation  of after tax cash flows

Working note:- Depreciation expense

First year=1000000*20%=200000

Second year=1000000*32%=320000

Third Year =1000000*19.2%=192000

Total Depreciation=712000

Adjusted cost basis of truck= 1000000-712000=288000

Sale of Truck= 612000

Gain on sale of truck= 612000-288000=324000

Depreciation Recapture=324000

Computation of After tax cash flows

Gross Income 1500000

Add:-Depreciation recapture 324000

Total 1824000

Less:- Gross Expenses 1100000

Less:-Depreciation 712000

Net Income 12000

Tax @ 21% 2520

Income after tax 9480

After tax cash flow= Income after tax + Depreciation=9480+712000=721480


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