Question

In: Finance

Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of...

Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, which originally cost $44.00 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $18.80 million. The firm’s tax rate is 30%. What is the after-tax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 1 decimal place.)

Solutions

Expert Solution

Calculation of After Tax Cash Flow from the sale of the equipment:

Cash flow from the sale of equipment is $18.80 million. But we need after tax cash flow. Therefore first we need to tax on capital gain ( i.e. tax on sale of equipment)

Calculation of Tax amount on sale :

Original cost of equipment = $ 44 million

Tax life of equipment = 5 years

Method of depreciation = Straight line method.

Now 3 years has been passed. Therefore depreciation for 3 years = ( $ 44 million / 5 years ) * 3 years = $ 26.4 million

Carrying cost of equipment after 3 years = Original cost - Depreciation for 3 years = $ 44 million - $ 26.4 million

= $ 17.6 million

Carrying cost of equipment is $ 17.6 million and we can sold it for $ 18.80 million.

Therefore capital gain on sale = $18.80 - $ 17.60 = $ 1.20 million

Tax on capital gain = Gain * Tax rate = $ 1.20 million * 30 % = $ 0.36 million

Therefore after tax Cash flow from the sale of equipment = Sale price - Tax amount

= $ 18.80 million - $ 0.36 million

= $ 18.4 million

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A few years ago, the ACME Manufacturing Company installed automated robots worth millions of dollars in...
A few years ago, the ACME Manufacturing Company installed automated robots worth millions of dollars in its furniture assembly lines, believing that the robots would improve profitability and increase the efficiency of the manufacturing process. However, ACME lost many millions of dollars more despite the fact that it was able to make furniture faster using the robots. Why would this happen?
JCL Inc. is a major chip manufacturing firm that sells its products to computer manufacturers like...
JCL Inc. is a major chip manufacturing firm that sells its products to computer manufacturers like Dell, HP, and others. In simplified terms, chip making at JCL Inc. involves three basic operations: depositing, patterning, and etching. Depositing: Using chemical vapor deposition (CVD) technology, an insulating material is deposited on the wafer surface, forming a thin layer of solid material on the chip. Patterning: Photolithography projects a microscopic circuit pattern on the wafer surface, which has a light-sensitive chemical like the...
Holmes Inc. purchased computer equipment two years ago at a total cost of $1,000,000. These computers...
Holmes Inc. purchased computer equipment two years ago at a total cost of $1,000,000. These computers could be sold today for $300,000. If these computers are sold in five years, they will be worth $50,000. The CCA rate for these computers is 30%.          The company is now considering whether it should replace these computers with newer and more powerful ones. The estimated total purchase cost of the new computers is $1.5 million. These computers can be sold for $300,000...
6.      Holmes Inc. purchased computer equipment two years ago at a total cost of $1,000,000....
6.      Holmes Inc. purchased computer equipment two years ago at a total cost of $1,000,000. These computers could be sold today for $300,000. If these computers are sold in five years, they will be worth $50,000. The CCA rate for these computers is 30%.          The company is now considering whether it should replace these computers with newer and more powerful ones. The estimated total purchase cost of the new computers is $1.5 million. These computers can be sold...
6.       Holmes Inc. purchased computer equipment two years ago at a total cost of $1,000,000....
6.       Holmes Inc. purchased computer equipment two years ago at a total cost of $1,000,000. These computers could be sold today for $300,000. If these computers are sold in five years, they will be worth $50,000. The CCA rate for these computers is 30%.          The company is now considering whether it should replace these computers with newer and more powerful ones. The estimated total purchase cost of the new computers is $1.5 million. These computers can be sold...
Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. The MACRS...
Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. You sold the equipment today for $82,500. Which of these statements is correct if your tax rate is 23 percent and you ignore bonus depreciation? Multiple Choice The tax due on the sale is $10,032.60. The book value today is $40,478. The book...
Mead Company is considering the replacement of some of its manufacturing equipment. Information regarding the existing...
Mead Company is considering the replacement of some of its manufacturing equipment. Information regarding the existing equipment and the potential replacement equipment follows: Existing Equipment Replacement Equipment Cost $ 300,000 Cost $ 250,000 Operating expenses* 240,000 Operating expenses* 160,000 Salvage value 40,000 Salvage value 40,000 Market value 120,000 Useful life 8 years Book value 90,000 Remaining useful life 8 years *The amounts shown for operating expenses are the cumulative total of all such expected expenses to be incurred over the...
Your company is about to increase its production capacities therefore it is going to invest into new manufacturing equipment 3 years from now.
Your company is about to increase its production capacities therefore it is going to invest into new manufacturing equipment 3 years from now. The price of these equipment is going to be 30 million $ 3 years from now. Your company finances this purchase by saving a given amount of money on its saving account at the end of each month for 3 years. The interest rate is 12%. How much money should be saved at the end of each...
To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering...
To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank...
To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering...
To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT