You purchased a machine for $ 1.12 million three years ago and have been applying straight-line depreciation to zero fo...
You purchased a machine for $ 1.12 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 $742,000, what is your incremental cash flow from selling the machine?
Homework Answers
COST OF MACHINE = 1120000
LIFE = 7 YEARS
DEPRECIATION PER YEAR = COST/LIFE = 1120000/ 7 = 160000
3 YEARS DEPRECIATION = 160000 X 3 = 480000
BOOK VALUE = COST - DEPRECIATION CHARGED FOR 3 YEARS
BOOK VALUE = 1120000 - 480000 = 640000
SALE VALUE OF MACHINE = 742000
GAIN ON SALE OF MACHINE = SALE VALUE - BOOK VALUE
GAIN ON SALE OF MACHINE = 742000 - 640000 = 102000
TAX ON GAIN ON SALE OF MACHINE = 102000 X 40% = 40800
INCREMENTAL CASH FLOW = SALE VALUE - TAX ON GAIN ON SALE OF MACHINE
INCREMENTAL CASH FLOW = 742000 - 40800 = 701200
Answer : 701200 (Thumbs up please)
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