Question

Heald and Swenson Inc. purchased a drill press for $850,000 one year and nine months ago. The asset has a six-year life and has been depreciated according to the following accelerated schedule. The press was just sold for $475,000. The firm's marginal tax rate is 35%. Calculate Heald and Swenson's Taxable profit and cash flow on the sale. Assume depreciation is spread evenly within each year.

Year	% of Cost
1	55%
2	20%
3	10%
4	5%
5	5%
6	5%

Answer 1

	Given that -
i	Drill press cost		$850,000
ii	Depreciation for year 1
	=850000*55%		$467,500
iii	Depreciation for year 2 for 9 month
	=850000*20%*9/12		127500
iv=i-ii-iii	Book value of asset		$255,000
v	sales price		$475,000
vi=v-iv	Gain on sale of asset		$220,000
vii=vi*35%	Tax on gain on sale of asset		$77,000
viii=v-vii	Net cash flow after tax		$398,000
	Hence, Gain on sale of asset = $220000 & Net cash flow after tax = $398000