Question

Manzana Inc. is buying a piece of equipment. The equipment costs $1,000,000. The equipment is considered for tax purposes as a 5-year MACRS class. If the equipment is sold at the end of 4 years for $200,000, what is termination value of the equipment (the after-tax cash flow from the sale of this asset)? The marginal tax rate is 20 percent. The Annual expense percentage for a 5-year MACRS property from year 1 to 6 respectively are: 20.00%; 32.00%; 19.20%; 11.52%; 11.52: and 5.76%. PLEASE SHOW ALL STEPS!!

Answer 1

Sales Value		a	$        2,00,000
Book Value		b	$        1,72,800
Profit (loss) on sale of asset		c=a-b	$           27,200
Tax on profit (loss) on sale		d=c*20%	$              5,440
After tax sale proceeds		e=a-d	$        1,94,560
Working:
Depreciation Schedule:
Year	Cost	Depreciation Rate	Depreciation Expense	Accumulated depreciation Expense	Book Value at the end of year
	a	b	c=a*b	d	e=a-d
1	$       10,00,000	20.00%	$        2,00,000	$       2,00,000	$       8,00,000
2	$       10,00,000	32.00%	$        3,20,000	$       5,20,000	$       4,80,000
3	$       10,00,000	19.20%	$        1,92,000	$       7,12,000	$       2,88,000
4	$       10,00,000	11.52%	$        1,15,200	$       8,27,200	$       1,72,800