Question
In: Finance
Manzana Inc. is buying a piece of equipment. The equipment costs $2,000,000. The equipment is considered...
Manzana Inc. is buying a piece of equipment. The equipment costs $2,000,000. The equipment is considered for tax purposes as a 5-year MACRS class. If the equipment is sold at the end of 6 years for $400,000, what is the after-tax cash flow from the sale of this asset (termination value of the equipment)? The marginal tax rate is 40 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%.
Solutions
Expert Solution
| Step-1:Book value at the end of year 6 | |||||
| Year end | Cost | Depreciation rate | Depreciation expense | Accumulated Depreciation expense | Book Value |
| a | b | c=a*b | d | e=a-d | |
| 1 | $ 20,00,000.00 | 20.00% | $ 4,00,000.00 | $ 4,00,000.00 | $ 16,00,000.00 |
| 2 | $ 20,00,000.00 | 32.00% | $ 6,40,000.00 | $ 10,40,000.00 | $ 9,60,000.00 |
| 3 | $ 20,00,000.00 | 19.20% | $ 3,84,000.00 | $ 14,24,000.00 | $ 5,76,000.00 |
| 4 | $ 20,00,000.00 | 11.52% | $ 2,30,400.00 | $ 16,54,400.00 | $ 3,45,600.00 |
| 5 | $ 20,00,000.00 | 11.52% | $ 2,30,400.00 | $ 18,84,800.00 | $ 1,15,200.00 |
| 6 | $ 20,00,000.00 | 5.76% | $ 1,15,200.00 | $ 20,00,000.00 | $ 00.00 |
| Step-2:After tax sale proceeds | |||||
| After tax sale proceeds | = | Before tax sale proceeds | * | (1-Tax rate) | |
| = | $ 4,00,000 | * | (1-0.40) | ||
| = | $ 2,40,000 | ||||
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