Question
In: Finance
A new machine will be purchased today for $65,000, used for 4 years and sold. The...
A new machine will be purchased today for $65,000, used for 4 years and sold. The machine will be straight line depreciated for 8 years. The anticipated market value of the alpha machine in 4 years is $24,000. The tax rate is 31%.
a) Calculate the book value of the machine after 4 years.
b) Calculate the gain or loss on sale of the alpha machine. Calculate the tax effect of the gain or loss.
c) What is the termination cash flow associated with the selling the alpha machine in 4 years
Solutions
Expert Solution
| Ans 1) | Computation of book value after 4 year | ||||
| annual depreciation = Cost / usefull life | |||||
| 65000/8 | |||||
| 8125 | |||||
| Book value after 4 year = | 32500 | ||||
| 65000-8125*4 | |||||
| ans = | $ 32,500 | ||||
| Ans 2) | Computation of gain or loss | ||||
| Sales price = | 24000 | ||||
| book value = | $ 32,500 | ||||
| Loss on sale = | $ 8,500 | ||||
| ans = loss | $ 8,500 | ||||
| Ans 3) | Computation of terminal cash flow | ||||
| Sales price = | 24000 | ||||
| Tax shield on loss = | 2635 | ||||
| 8500*31% | |||||
| Terminal cash flow = | 26635 | ||||
| Ans = | 26635 | ||||
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