Deer and Doe purchased $120,000 of equipment six years ago. The equipment is 7-year MACRS property....

Deer and Doe purchased $120,000 of equipment six years ago. The equipment is 7-year MACRS property. The firm is selling this equipment today for $24,500. What is the after-tax cash flow from this sale if the tax rate is 35 percent?

Year 1 2 3 4 5 6 7 8

Percent 14.29 24.49 17.49 12.49 8.93 8.93 8.93 4.45

	a.	$27,455.40
	b.	$25,785.40
	c.	$15,925.00
	d.	$21,544.60
	e.	$18,209.60

Expert Solution

Computation of annual depreciation expense and book value of the equipment:

Year	Initial cost of equipment (C)	MACRS % (R)	Annual depreciation (C x R)	Accumulated Depreciation (A)	Book Value (C -A)
1	$120,000	0.1429	$17,148	$17,148	$102,852
2		0.2449	$29,388	$46,536	$73,464
3		0.1749	$20,988	$67,524	$52,476
4		0.1249	$14,988	$82,512	$37,488
5		0.0893	$10,716	$93,228	$26,772
6		0.0893	$10,716	$103,944	$16,056
7		0.0893	$10,716	$114,660	$5,340
8		0.0445	$5,340

Book value of the equipment at the end of year 6 is $ 16,056

Market value = $ 24,500

After tax cash flow from sales of equipment

= Market value – [(Market value – Book value) x Tax rate]

= $ 24,500 – [($ 24,500 - $ 16,056) x 0.35]

= $ 24,500 – ($ 8,444 x 0.35)

= $ 24,500 – $ 2,955.40

= $ 21,544.60

After-tax cash flow from the sales of equipment is $ 21,544.60

Hence option “d. $ 21,544.60” is correct answer.

jeff jeffy answered 1 year ago

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