Question

Solve using both depreciation and after-tax procedures.

A MACRS 5-year equipment was purchased at $3,500. After taken 3-year depreciation, the equipment was sold for $4,000. Calculate the after tax cash flow of this transaction. Assuming Capital Gain tax rate is 20% and depreciation recapture tax rate is 35%.

Answer 1

MACRS depreciation schedule
	Total Cost	$3,500.00
	Recovery Period (in years)	5
Depreciation Schedule: MACRS Method 3 year depreciation
Year	Rate	Depreciation	Accumulated Depreciation	Book Value	Tax shield on depreciation @ 35%
0		$0.00	$0.00	$3,500.00	$0.00
1	20.00%	$700	$700	$2,800	$245.00
2	32.00%	$1,120	$1,820	$1,680	$392.00
3	19.20%	$672	$2,492	$1,008	$235.20
Sales price =		$4,000
Book value =		-$1,008
Profit		$2,992
Tax @ 20%		$598.40
After tax cash flow from sales	$4,598.40
Year	Depreciation tax shield	After tax sales cash flow	Total after tax cash flow
0
1	$245.00		$245.00
2	$392.00		$392.00
3	$235.20	$4,598.40	$4,833.60