Question
In: Finance
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?
Solutions
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
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