Question

USE THE FOLLOWING INFORMATION FOR THE NEXT 3 QUESTIONS ABC Company bought a new machine that cost $500,000 on 1/1/15. The machine had a useful me of 10 years. ABC Company used straight-line depreciation with an estimated salvage value of SO. ABC Company is subject to an income tax rate of 40%. ABC Company sold the machine on 171718 (after using the machine for exactly 3 full years. In the next 3 questions, you are to determine the Net Cash Inflow (NCF) from the sale of the machine on 1/1/18. 20. If the machine was sold on 1/1/18 for $340,000, the Net Cash Inflow (NCF) is: A. $344,000 B. $400,000 C. $420,000 D. $340,000 21. If the machine was sold on 1/1/18 for $400,000, the Net Cash Inflow (NCF) is: A. $420,000 B. $400,000 C. $350,000 D. $380,000

Answer 1

20.A.$344,000.

working:

annual depreciation = (cost - salvage value) / number of years

=> (500,000-0) / 10 years

=>$50,000.

book value after 3 years = 500,000- (50,000*3)

=>350,000.

sale price	340,000
less:book value	(350,000)
loss	(10,000)

tax saving on loss = 10,000* 40%=>4,000.

net cash flow = sale price + tax saving

=>340,000+4,000

=>344,000.

21.D.$380,000.

working:

sale price	400,000
less: book value	(350,000)
gain	50,000

tax expense on gain = 50,000*40% =>20,000.

net cash flow = sale price - tax expense

=>400,000-20,000

=>380,000.