Question

The Jones Company has just completed the third year of a​ five-year MACRS recovery period for a piece of equipment it originally purchased for $296,000.

a. What is the book value of the​ equipment?
b. If Jones sells the equipment today for $184,000 and its tax rate is 25%​, what is the​ after-tax cash flow from selling​ it?
Note​: Assume that the equipment is put into use in year 1.

Answer 1

Below is the depreciation schedule for Asset A:

Year	Opening balance	Investment	Depreciation	Closing balance
0	$ 296,000.00	20.00%	59200	236800
1	$          236,800.00	32.00%	94720	142080
2	$          142,080.00	19.20%	56832	85248
3	$            85,248.00	11.52%	34099.2	51148.8
4	$            51,148.80	11.52%	34099.2	17049.6
5	$            17,049.60	5.76%	17049.6	0

Opening balance of year 1= Cost
Opening balance = previous year's closing balance for all years after year 1
Depreciation rates are original rates as per the MACRS schedule
Depreciation = depreciation rate x cost
Closing balance = Opening balance - depreciation

a. Book value is the same as the closing balance and that at the end of the year 3 is 51148.8

b.After tax CF = Sale price - Tax rate x (Sale Price - Book Value)

After tax CF = 184,000 -0.25 x (184000- 51148.8)

After tax CF = 150787.2