Question

You are evaluating a potential purchase of several light-duty trucks. The initial cost of the trucks will be $145,000. The trucks fall in the MACRS 5-year class that allows depreciation of 20% the first year, 32% the second year, 19% the third year, 12% the fourth year, 11% the fifth year, and 6% the sixth year. You expect to sell the trucks for 14,500 at the end of five years. The expected revenue associated with the trucks is $111,000 per year with annual operating costs of $57,000. The firm's marginal tax rate is 40.0%. What is the after-tax cash flow associated with the sale of the equipment?

Question 33 options:

	$8,700
	$12,180
	$5,800
	$3,480
	$6,380

Answer 1

The after tax cash flow is computed as shown below:

= Sales value - tax expenses

Book value at the end of year 5 is computed as follows:

= Purchase price - Depreciation (20% + 32% + 19% + 12% + 11%)

= $ 145,000 - 94%

= $ 8,700

Profit on sale is computed as follows:

= Sales value - book value

= $ 14,500 - $ 8,700

= $ 5,800

Tax on profit is computed as follows:

= Profit x tax rate

= $ 5,800 x 40%

= $ 2,320

So, the after tax sales value will be computed as follows:

= $ 14,500 - $ 2,320

= $ 12,180

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