Question

A company bought an equipment fo 1 million 9 years ago. It uses straightline depreciation for 10 years to book value 0 after 10 years. If the company liquidates the equipment after 9 years and sold it for 80,000, with tax rate 20%, what's the after tax cash flow?

Answer 1

Depreciation each year under straight line method

= ( Purchase cost – Salvage value) / Useful life

= ( $1,000,000 – 0) / 10

= $100,000 each year

Cumulative depreciation for 9 years

= Depreciation each year x Number of years

= $100,000 x 9

= $900,000

Book value at the end of 9 years

= Purchase cost – Cumulative Depreciation

= $1,000,000 - $900,000

= $100,000

Loss of sale

= Book value – Sale Value

= $100,000 - $80,000

= $20,000

Cash inflow due to savings in tax on loss

= Loss x Tax Rate

= $20,000 x 20%

= $4,000

So, after tax cash inflow

= Sale value + Savings in tax due to loss

= $80,000 + $4,000

= $84,000