Question

Consider an asset that costs $475,200 and is depreciated straight-line to zero over its 8-year tax life. The asset is to be used in a 5-year project; at the end of the project, the asset can be sold for $59,400.

Required : If the relevant tax rate is 31 percent, what is the aftertax cash flow from the sale of this asset?

Answer 1

	CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD
	Purchase Cost of Machine	$            4,75,200.00
	Less: Salvage Value	$                               -
	Net Value for Depreciation	$            4,75,200.00
	Usefule life of the Assets	8 years
	Depreciation per year = Value for Depreciation / 8 years =	59,400.00
	Total Depreciation in 5 years = ($ 59,400 X 5)=	2,97,000.00
	Book Value = Purchae price - Total Depreciation =
	Purchase Price =	$                  4,75,200
	Less By	"- " By
	Total Depreciation in 5 years =	$                  2,97,000
	Book value at the end of 5 years =	$                  1,78,200
	CALCULATION OF NET PROFIT AFTER TAX
	Profit on Sale =Selling price - Book Value
	Selling Price =	$                      59,400
	Less :	"-"
	Book Value =	$                  1,78,200
	Profit on Sale =	$                -1,18,800
	Less: Tax @ 31% =	$                               -
	(Tax is Nil because there is no profit on sale)
	Net Profit after TAX	$                -1,18,800
	Calculation of after-tax Cash Flow when the machine is sold at the end of year Five years
	Salvage value at the end of 5th years =	$                59,400.00
	Less: Tax (As computed above)	-
	Net Cash Flow	$                59,400.00
	Answer = $ 59,400