Question

ABC Company bought a new machine that cost $500,000 on 1/1/15. The machine had a useful life of 10 years. ABC Company used straight-line depreciation with an estimated salvage value of $0. ABC Company is subject to an income tax rate of 40%. ABC Company sold the machine on 1/1/18 (after using the machine for exactly 3 full years. In the next 3 questions, you are to determine the Net Cash Inflow (NCF) from the sale of the machine on 1/1/18.

5. If the machine was sold on 1/1/18 for $350,000, the Net Cash Inflow (NCF) is: A. $0 B. $200,000 C. $350,000 D. $400,000

6. If the machine was sold on 1/1/18 for $400,000, the Net Cash Inflow (NCF) is: A. $420,000 B. $400,000 C. $350,000 D. $380,000

7. If the machine was sold on 1/1/18 for $340,000, the Net Cash Inflow (NCF) is: A. $344,000 B. $400,000 C. $420,000 D. $340,000

Answer 1

Solution:

Book Value on 1/1/2018 = Cost - Depreciation for 3 years

= $500,000 - ($500,000*3/10)

= $500,000 - $150,000

= $350,000

Now,

Solution 5:

sale value = $350,000

Profit on sale = Sale value -Book value on 1/1/2018 = $350,000 - $350,000 = $0

Therefore TaxAmount = $0

Net Cash inflow = Sale Value - Tax Amount = $350,000 - $0 = $350,000

Hence, option "C" is correct.

Solution 6:

sale value = $400,000

Profit on sale = Sale value -Book value on 1/1/2018 = $400,000 - $350,000 = $50,000

Therefore TaxAmount = $50,000*40% = $20,000

Net Cash inflow = Sale Value - Tax Amount = $400,000 - $20,000 = $380,000

Hence, option "D" is correct.

Solution 7:

sale value = $340,000

Profit (Loss) on sale = Sale value -Book value on 1/1/2018 = $340,000 - $350,000 = ($10,000) Loss

Therefore Tax Saving on Loss = $10,000*40% = $4,000

Net Cash inflow = Sale Value + Tax Saving = $340,000 + $4,000 = $344,000

Hence, option "A" is correct.