Question

The Jones Company has just completed the third year of a​ five-year MACRS recovery period for a piece of equipment it originally purchased for $299,000.

a. What is the book value of the​ equipment?

b. If Jones sells the equipment today for $175,000 and its tax rate is 35%​,

what is the​ after-tax cash flow from selling​ it?

Note​:

Assume that the equipment is put into use in year 1.

a. What is the book value of the​ equipment?

The book value of the equipment after the third year is. (Round to the nearest​ dollar.)

Please show the steps taken to get to the final answer.

Answer 1

a]

Book value = purchase price - accumulated depreciation.

Accumulated depreciation = total depreciation for 3 years.

The depreciation rates for the first 3 years as per 5-year MACRS are 20%, 32%, and 19.2%.

Accumulated depreciation = $299,000 * (20% + 32% + 19.2%) = $212,888.

Book value = $299,000 - $212,888 = $86,112.

b]

after-tax cash flow = sale price - tax.

Tax = (sale price - book value) * tax rate

Tax = ($175,000 - $86,112) * 35% = $31,110.80.

after-tax cash flow =  $175,000 - $31,110.80

after-tax cash flow =  $143,889.20