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URGENT you purchased a machine for $ 1.01 million three years ago and have been applying​...

URGENT

you purchased a machine for $ 1.01 million three years ago and have been applying​ straight-line depreciation to zero for a​ seven-year life. Your tax rate is 40 %. If you sell the machine today​ (after three years of​ depreciation) for $ 719 comma 000​, what is your incremental cash flow from selling the​ machine?

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Expert Solution

The machine was purchased 3 years ago for $ 1010000. The depreciation was charged on a Straight Line Method for a period of 7 years.

Therefore, the depreciation charged per year = $1010000/7 = $ 144285.71

Depreciation charged till now = $432857.14.

Closing balance of the machinery would be = $577142.86.

Saving on the depreciation per year = Depreciation * tax rate = $144285.71*40% = $57714.28

Selling Price of the Machine = $ 719000

Profit on Selling Price = $719000-$577142.86 = $141857.14

Assuming the tax on Short Term Capital Gain = 40%

Tax on the Profit = 141857.14*40% = $56742.86.

Therfore, the Change in Cash Flow from Selling the machine would be= Profit from Sale - tax paid+ Depreciation amount - tax saved on depreciation

= 141857.14-56742.86+144285.71-57714.28

= $171685.71

The Incremental Cash Flow = $171685.71- ($144285.71-$57714.28)

= $85114.28

Thus, the incremental cash flow from Selling the machine for the current year would be $85114.28

jeff jeffy answered 2 years ago
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