Question

Healthy Potions, Inc., a pharmaceutical company, bought a machine at a cost of $2 million five years ago that produces pain-reliever medicine. The machine has been depreciated over the past five years, and the current book value is $880,000. The company decides to sell the machine now at its market price of $1 million. The marginal tax rate is 33 percent.

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What are the relevant cash flows?

Cash flows

$

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How do they change if the market price of the machine is $600,000 instead?

Change in cash flow

$

Answer 1

Case :1 If the Market Price is $1 Million

Particular	Amount
Market Value	1,000,000.00
Less: Current Book Value	880,000.00
Capital Gain	120,000.00
Tax Expense	39,600.00	(120,000*33%)
Cash Flow before Tax	1,000,000
Less: Tax	39600
Cash Flow after Tax	960,400

Case :2 If the Market Price is $600,000

Particular	Amount
Market Value	600,000.00
Less: Current Book Value	880,000.00
Capital Loss	(280,000.00)
Tax Saving	(92,400.00)	(280,000*33%)
Cash Flow before Tax	1,000,000
Add: Tax saving	92400
Cash Flow after Tax	1,092,400