Question

You are evaluating the shutdown phase of a project and are reviewing the salvage value of a machine that you bought for your project. You paid $20,000 for the machine originally, and have depreciated $12,000 dollars so far. You will be able to sell the machine for $18,000. The tax rate for your company is 30%. What is the NET cashflow from the old machine? -- Is it positive or negative? 10000 -$7000 $7000 -10000

Answer 1

The net cash flow from the old machine:

Profit on sale is computed as follows:

= Selling price - book value

Book value is computed as shown below:

= Original cost paid - depreciation

= $ 20,000 - $ 12,000

= $ 8,000

So the profit will be:

= $ 18,000 - $ 8,000

= $ 10,000

Tax on profit

= $ 10,000 x 30%

= $ 3,000

So the net cash flow will be:

= Selling price - tax on profit - initial cost + depreciation

= $ 18,000 - $ 3,000 - $ 20,000 + $ 12,000

= $ 7,000

So the correct answer is option of $ 7,000

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